\MERICAN RAILWAYS 
AS INVESTMENTS 



CARL SNYDER 




Class H S ^ 4 173 

Book S C, 

Copyright N?._ 



COPYRIGHT DEPOSIT. 



AMERICAN RAILWAYS AS INVESTMENTS 



. *t 



In Preparation 
THE MECHANISM OF THE STOCK MARKET 

An Inductive Study 



AMERICAN RAILWAYS 
AS INVESTMENTS 



A Detailed and Comparative Analysis of All the 

Leading Railways, from the Investor's Point 

of View; With an Introductory 

Chapter on 

THE METHODS OF ESTIMATING RAILWAY VALUES 



BY 



CARL SNYDER 

h 




NEW YORK 

THE MOODY CORPORATION 

LONDON.* FRED'C C. MATHIESON & SONS 

16 COPTHALL AVE., E. C. 

I907 






LfBKARY of CONGRESS \ 
Two Copies Received 

JUL10 190T i 
. Copyright Entry | 

rHosu j, >*? 07 

GLASS fiX. XXc„ No, 
COPY B. \ 



Copyright, 1907, by 

THE MOODY CORPORATION 

All Rights Reserved 



How did I make my fortune ? 

By never trying to buy at the bottom 

and by always selling too soon." 

—ROTHSCHILD 




•#&*$*&+ 



tivAX^ t 



25 A** 1 



Dplement to "American Railways 







Diagrammatic Railway Map of the United States, showing the main systems and the routes of traffic. Supplement to "American Railways 

as Investments" by Carl Snyder. Published by The Moody Corporation. 



CONTENTS 

, Page. 

Alabama Great Southern Railroad 67 

Ann Arbor Railroad (See Detroit, Toledo & Ironton) 292 

Atchison, Topeka & Sante Fe Railway 69 

Atlantic Coast Line Railroad 83 

Baltimore & Ohio Railroad 94 

Boston & Maine Railroad 110 

Buffalo, Rochester & Pittsburg Railway 118 

Canadian Northern Railway 125 

Canadian Pacific Railway 128 

Central of Georgia Railway 140 

Central Railroad of New Jersey 147 

Chesapeake & Ohio Railway 156 

Chicago & Alton Railway 167 

Chicago & Eastern Illinois Railroad 177 

Chicago & North Western Railway 180 

Chicago, Burlington & Quincy Railroad 191 

Chicago Great Western Railway 199 

Chicago, Indiana & Southern Railroad 209 

Chicago, Indianapolis & Louisville Railway 210 

Chicago, Milwaukee & St. Paul Railway 213 

Chicago, St. Paul, Minneapolis & Omaha Railway 226 

Cincinnati, Hamilton & Dayton Railway 232 

Cincinnati, New Orleans & Texas Pacific Railway 240 

Cleveland, Cincinnati, Chicago & St. Louis Railway 242 

Cleveland, Lorain & Wheeling Railway 250 

Colorado & Southern Railway 253 

Delaware & Hudson Company 263 

Delaware, Lackawanna & Western Railroad 273 

Denver & Rio Grande Railroad 283 

Detroit, Toledo & Ironton Railway 292 

Duluth, South Shore & Atlantic Railway 301 

Erie Railroad 306 

Evansville & Terre Haute Railroad 319 

(7) 



8 CONTENTS 

Page. 

Fort Worth & Denver City (See Colorado & Southern) 253 

Georgia Southern & Florida Railway 321 

Grand Rapids & Indiana Railway 322 

Grand Trunk Railway of Canada 325 

Grand Trunk Pacific Railway 331 

Great Northern Railway 333 

Hocking Valley Railway 353 

Illinois Central Railroad 360 

Indiana, 111. & Iowa (see Chic, Ind. & Southern) 209 

International & Great Northern Railroad 370 

Iowa Central Railway 372 

Kanawha & Michigan Railway 376 

Kansas City Southern Railway 378 

Lake Erie & Western Railroad 384 

Lake Shore & Michigan Southern Railway 388 

Lehigh Valley Railroad 396 

Long Island Railroad 406 

Louisville & Nashville Railroad 412 

Maine Central Railroad 423 

Michigan Central Railroad 428 

Minneapolis & St. Louis Railroad 433 

Minneapolis, St. Paul & Sault Ste. Marie Railway 441 

Missouri, Kansas & Texas Railway 449 

Missouri Pacific System 456 

Mobile & Ohio Railroad 469 

Nashville, Chattanooga & St. Louis Railway 470 

New York Central & Hudson River Railroad 471 

New York, Chicago & St. Louis Railroad 481 

New York, New Haven & Hartford Railroad 487 

New York, Ontario & Western Railroad 501 

New York, Susquehanna & Western Railroad 508 

Norfolk & Western Railway 510 

Northern Central Railway 519 

Northern Pacific Railway 524 

Pennsylvania Railroad 542 

Pennsylvania Company 566 

Pere Marquette Railroad 574 

Peoria & Eastern Railway 580 

Philadelphia & Erie Railroad 581 

Philadelphia, Baltimore & Washington Railroad 583 



CONTENTS 9 

, Page. 

Pittsburgh & Lake Erie Railroad 585 

Pittsburgh, Cincinnati, Chicago & St. Louis Railway 589 

Reading Company 595 

Rock Island System 610 

Rutland Railroad 627 

St. Louis & San Francisco Railroad 630 

St. Louis & Southwestern Railway 639 

Seaboard Air Line Railway 646 

Southern Pacific System 656 

Southern Railway 670 

Texas & Pacific Railway 681 

Toledo & Ohio Central Railway 686 

Toledo, St. Louis & Western Railroad 689 

Union Pacific Railroad 696 

Vandalia Railroad 718 

Wabash Railroad 722 

West Jersey & Seashore Railroad 736 

Western Maryland Railroad 738 

Western Pacific Railroad 742 

Wheeling & Lake Erie Railroad 748 

Wisconsin Central Railway 753 

Yazoo & Mississippi Valley Railroad 761 



FOREWORD 

The aim of this work is to provide the general investor, 
the banker and the investment broker with the means whereby 
he may judge intelligently and readily, so far as the accessible 
facts will permit, of the value of the securities of the different 
railroads passed under review. The volume covers the operations 
of nearly 200,000 miles of road, or about 90% of the total for the 
country. 

More especial attention, and detail, has naturally been given 
to the more important lines and systems, on the theory that they 
present greater opportunities for safe investment, greater stabil- 
ity, wider fluctuations in value and therefore larger opportuni- 
ties for profit, with less liability to suffer from the minor accidents 
of trade reverses, manipulation or bad management. 

At the end of each analysis or review, conclusions and 
opinions are offered, but only for what they are worth ; that is 
to say, all the material facts upon which these conclusions are 
based have been given in full. The details, the figures, the 
tables are there; the investor may therefore judge for himself 
as to the validity of the conclusions reached. The inductions 
offered are suggestions and nothing more. 

The aim has been to provide the broadest possible basis of 
judgment, to offer the largest perspective, to cut out that 
which is evanescent, not to look at last year's results or this 
year's conditions merely, but to consider what has been done 
through a series of years, and under varying conditions. Only 
in this wise is it possible to frame any intelligent opinion of 
the future. Tendencies do not rapidly change. Established 
roads do not suddenly become great earners ; they do not as a 
rule radically change their policies, save under a radical change 
of ownership. 

On the other hand, companies do not default their bonds, 
they do not pass their dividends, unless conditions have been 
preparing for such a result. Given a reasonable degree of honesty 

(11) 



12 FOREWORD 

in the published reports and these possibilities may be more or 
less foreseen. 

Throughout, especial emphasis has been given to the elemen- 
tary fact that Operating Ratios, Surpluses, Per Cent of Surplus 
on Stock, and all their like are for the most part simply matters 
of bookkeeping and often little more. Earnings may be con- 
cealed, operating expenses may be heavily charged for improve- 
ments, or maintenance may be slighted. It is the business of 
this book to consider all these questions in each case, and to 
state all the facts that are known. 

Especial attention has been given to the matter of main- 
tenance and to the sums devoted to improvements from earnings. 
To permit of an intelligent judgment as to these matters, 
reliance has not been placed upon the charges for one year or 
two years, but for a series of years, compared each year with 
the traffic density. The showings for the different years are 
then averaged, and this average is in turn compared with an 
exactly similar average of four, five or six other roads in the 
same territory, with the same general character of traffic, and 
therefore with the same general needs. 

It is in this manner that the nominal surplus profits shown 
in the reports are judged, and conclusions formed as to how far 
the percentage which these profits show on the stock are real 
profits or not. 

Questions as to capitalization, style of capitalization, in- 
crease of capitalization, the relation of capital to net earnings, 
the proportion of fixed charges to total net income have been 
considered in much more detail than is customary, in the belief 
that these items are highly significant and vital. 

Particular consideration has been given to the Factor of 
Safety or margin of income over fixed charges. In the judgment 
of bond values this factor is of primary interest. The small 
investor, in particular, has a just dread of receiverships and 
reorganizations. He will be perspicaciously shy, therefore, of 
securities on which cessation of interest payments have ever 
been threatened, no matter how valuable, intrinsically, may be 
the property on which these securities are a lien. 

In the same manner, the investor in stocks, common or pre- 
ferred, has a vital interest in knowing how far the earning 



FOREWORD 13 

capacity of the road may be impaired before dividends are 
endangered. 

In each case the treatment has been uniform, so as to permit 
of rapid comparisons and ready reference, the exposition follow- 
ing the appended 

General Scheme. 

Importance and notable characteristics. 

History. 

Territory (Mileage, etc.) 

Ownership (Directors, number of shareholders). 

Affiliations (Community of Interest). 

Capitalization (Including Rentals, Leases, etc.). 

Value of Equities Owned. 

Style of Capitalization. 

Increase of Capitalization from 1900. 

Character of Traffic (Passenger Earnings, etc.). 

Stability of Earnings. 

Maintenance (amount of extra work, etc.). 

Improvements from Earnings. 

Surplus Earnings. 

Dividend Record (and "rights"). 

The Balance Sheet, Profit & Loss account. 

Investment Value (Price and Yield). 



It will be seen that the present work is as different as 
possible from the ordinary manual, which, however valuable it 
may be, is not always used to the best advantage by the general in- 
vestor, who has no time for exhaustive study nor to acquire the 
training that is requisite for its most intelligent use. 

The aim has been to present an exposition which any reader 
may follow with understanding, no matter if he has never seen 
a railroad report or never purchased a railway bond or a share of 
stock. There is no mystery about railway management or bond 
or share values and if there be any mystery about a company's 
securities, or if its reports are not adequate and clear, the general 
investor will do well to let its issues alone. 



ACKNOWLEDGMENTS. 

A full expression of obligation is due the authors and pro- 
prietors of the following publications, for their free use in the 
preparation of this work: 

Moody's Manual of Railroads and Corporation Securities, 
published by The Moody Corporation, New York. 

Poor's Manual of Railroads, published by Poor's RR Manual 
Company, New York. 

The Financial Review, published annually by The Commer- 
cial & Financial Chronicle. 

The Wall Street Journal, New York. 

The Railroad Gazette, New York. 

The Railway Age, Chicago. 

"Earning Power of Railroads," Floyd W. Mundy, published 
annually by Metropolitan Advertising Co. 

Mr. Mundy's handy little manual presents an original analy- 
sis of the income account of all the important companies, to- 
gether with an analysis in percentages of the distribution of the 
gross income of each road over the various items of maintenance, 
cost of conducting transportation and surplus. This very useful 
publication is now in its seventh year. 

Readers who are interested to go further will find Mr. Thos. 
F. Woodlock's "Anatomy of a Railroad Report" a wonderfully 
clear and compact exposition of the subject; it includes also an 
illuminative discussion of ton-mile costs and the reduction of rail- 
way expenditures to their elementary units. 

In his "Art of Wall Street Investing," Mr. John Moody has 
dealt broadly and sensibly with much the same subject which is 
dealt with here specifically and concretely; and Mr. Thomas 
Gibson in his "Pitfalls of Speculation" has presented a sufficient 
warning to those who prefer to "speculate" (that is, gamble) 
rather than invest, showing that 90% of marginal accounts result 
in a loss. An admirable review of "The Work of Wall Street" 
has been presented by Mr. Sereno S. Pratt, well known as the 
editor of the Wall Street Journal.* 

Many items of historical interest have been drawn from the 
descriptive work, "American Railroads as Investments," by S. F. 
Van Oss, published 15 years ago. Thanks are also due to several 
railway friends for their kindness in looking through different 
chapters and for suggestions and criticisms offered. 

* A very complete catalogue of financial works, including all of those here named, is pub- 
lished by The Moody Corporation and will be supplied post-paid upon application. 

(14) 



INTRODUCTION 

The Methods of Estimating Railway Values 

The railways of the United States, reckoned together, represent 
the largest single "vested interest" in the world. Their nominal 
capitalization, stocks and bonds, now amounts to more than fourteen 
thousand millions, or, in American notation, fourteen "billions" of 
dollars. On these securities about five hundred millions are paid 
annually in interest and dividends: $300,000,000 in interest, 
and $200,000,000 in dividends. Capitalizing this at the prevailing 
savings bank rate of interest (4%), would represent a cash valua- 
tion of twelve and a half billion dollars. This is an average of 
$150 per capita, or $750 for every family in the United States. 

These securities, and especially the railway stocks, it is well 
known, are subject to very wide fluctuations in value. This may 
amount in the aggregate to a perfectly enormous sum. Thus from 
the highest point in 1902 to the low point of 1903-4, the average fall 
in railway shares was 30%. The rise from the low point of 1903-4 
to the high point of 1905-6 was over 50%. 

Nor were these enormous fluctuations confined to the weaker 
class of stocks. Below is a list of a dozen standard railway stocks 
showing their extreme range in price through seven years: 

LOW HIGH LOW HIGH LOW 

1900 1902 1903-4 1905-6 Mch. '07 

N. Y. & New Hav. 207 255 185 216 173 

N. Y. Central.... 125 168 112 167 112 

Pennsylvania 124 170 110 148 114 

Reading 15 78 37 164 91 

Lackawanna 171 297 230 560 445 

C. & N. W 150 271 153 249 *138 

St. Paul 108 198 133 199 *123 

Ills. Cent 110 173 125 184 134 

Louis. & Nash.... 68 159 95 157 108 

Atchison 18 96 54 110 83 

Union Pac 44 33 65 195 120 

Gr. Northern 144 203 160 348 *126 



Average.... 107 191 121 224 147 

*Ex. valuable " rights. " 
(15) 



16 INTRODUCTION 

It will be seen that this dozen standard securities rose in 
two years from an average value of $107 per share to $191 per share, 
then declined within a year to an average of $121 per share, then 
rose again in eighteen months to almost double this figure, and 

fell in 1907 to an average of $147 per share. 

The peculiar fact about this enormous change in values was 
that it had little to do with the actual earnings or the conditions of 
the railways themselves. Throughout this entire period there was 
practically no decrease in railway earnings,. nor in railway profits; 
on the contrary, each year of this period proved either equal to the 
preceding year, or showed a handsome increase. 

These fluctuations present very large possibilities for gain; 
equal danger of loss. They vitally affect a very considerable 
number of people. The rather unsatisfactory census of railway 
stockholders, taken by the Interstate Commerce Commission, 
showed between three and four hundred thousand shareholders 
of record in the United States. The actual number must be con- 
siderably higher. Moreover, a large proportion of railway shares 
are held by trust companies, banks and the like, whose stocks in 
turn may be widely distributed. 

It is a very well known fact that it is the general habit of the 
"public," the outside investor, to buy at the top, and to sell, when 
he does sell, at the bottom. Obviously this is reversing the Roth- 
schild "golden rule." 

In this book I wish to provide a work whereby the investor, 
instructed or not, may look at the market quotations of a given 
stock and, within broad limits, determine for himself whether this 
stock is cheap or dear, whether it be a good time to buy, or if he 
holds stocks, to sell. It is evident enough that this can be done only 
in a broad way and under reasonable reserves. But what is certain 
is that securities tend to vary far more widely than anything in 
their earnings, conditions, or prospects would naturally determine. 

There is apparently an ineradicable tendency <to over specula- 
tion, fostered always by clever manipulation by practised hands. 
This results in an inflation of prices beyond just values. The point 
is always reached where the bubble is punctured; the result is a 
violent fall. In a broad sort of way, here as elsewhere, action and 
reaction are equal. The price of shares tends to fall as much below 
their real worth as it had been raised above. 

In other words, the curve of stock quotations tends constantly 
to cross and recross what may be termed the Line of Value. It is 



INTRODUCTION 17 

the object of this work to enable the investor to estimate the Line 
of Value for a given stock. By reference then to the course of 
prices for the preceding six to eighteen months, he may gain some 
idea as to whether these prices are high or low. 

It is only by this means that an investor may effect his pur- 
chases with intelligence and foresight. It is the inevitable tendency 
of the human mind to believe that prevailing conditions will last. 
If prices are falling, it seems natural to believe that they will keep 
on falling, or at least "go lower." If they are rising, they are 
always to "rise a little more." The fortunes of folk with faith like 
this do not grow. 

Again, there are countless foolish people who think that values 
do not determine prices. They have their justification in the very 
obvious fact that the prices, of railway shares especially, go up and 
down with no seeming reference to the actual interest they yield, 
and often fall heavily in the face of every indication of solid worth. 

In consequence of this fact many men believe that the rise and 
fall of prices is entirely due to "Wall Street manipulation." They 
think they have simply to rely upon luck or "tips," forgetful that luck 
is generally on the side of the shrewdest player, and that tips are 
usually distributed that credulous folk may buy, when the "insiders" 
or the "pools" wish to sell. 

They do not invest : they hardly even speculate in the true sense 
of the word. They are simply gamblers and nothing more; and 
this applies just as much to the solid investor who makes a purchase 
on some one else's say-so as to the fatuous army which chases 
fortune upon "the Street" with margins. 

The demonstration that in a broad way prices do follow values 
is simple in the extreme. We have merely to take, say, twenty 
standard roads and set forth the amount of surplus income over 
fixed charges, that is, the sums annually available for dividends 
or improvements, as shown through a series of years, and find what 
per centage these sums represent, each year, on the combined capital 
stock of the roads under view. This series of percentages may 
then be plotted out in a diagram and we get what may be termed 
the Line of Value. If now, at the same time, we take the average 
market price of the stocks of these same twenty roads, we may from 
this series of averages plot another curve, which we may term the 
Line of Price. 



18 INTRODUCTION 

It is inevitable that in a broad way these two lines should be 
parallel. This is not saying that the Line of Price will follow the 
Line of Value from month to month or even from year to year ; 
but for a series of years it must. There will be intervals of devia- 
tion, and it is precisely these deviations which enable the investor to 
determine whether prices are high or low. 

He cannot look forward and determine whether next year's 
earnings will be great or small, but he can be certain that if the earn- 
ings continue good and prices are low, prices will rise. In other 
words, if the Line of Value and the Line of Price are wide apart 
the direction of one or the other will inevitably change. 

The construction of such a chart would have shown that 1902 
was a time for wise folk to sell out and give their money to the 
loan brokers to lend to foolish people at high rates of interest. 
When prices had fallen 30% in 1903-4 and the rates for money had 
likewise fallen 30 to 40% it was a time to buy. A stock like St. 
Paul, comfortably earning seven per cent, and putting the proceeds 
of flush years by in improvements, is easily worth $140 to $170 
according to the prevailing rates of interest. If the price is run 
up to $200 per share and at the same time money commands five to 
six per cent., it is obviously an inflated price and no one but gamblers 
or imbeciles will buy it at such a price. When it has fallen to below 
$140 a share, and money has fallen to between three and four per 
cent, and the road's earnings and prospects are just as good or better 
than they were, it is obviously a bargain which foresighted folk 
will snap up ; and that is what wise folk did. It rose again to $198 
per share in 1906. With money at five or six per cent., and other 
prospects remaining about the same, it was again a good time to 
sell. 

The simple fact is that investing is a business ; but not one in- 
vestor in fifty will give to his investments anything like the care 
and attention which he gave to the particular business through which 
his surplus funds were earned. Instead of studying values for him- 
self he will seek advice and "tips." 

If the investor is able to secure the wholly disinterested advice 
of some competent investment banker or broker, he may fare very 
well. For those who have no such connections, and for investors 
in general, this book has been planned. It does not follow the dry- 
as-dust path of the average railway report, nor the average railway 
analysis, but endeavors greatly to simplify the subject, and to strike 
out somewhat new and original lines. 



INTRODUCTION 19 

Elementary. 

The problem of railway valuation is comparatively simple, and 
beyond the reach of but few. A railway is primarily a carrier, a 
carter, a drayman. Obviously then, in considering an investment, 
we shall ask, What sort of a road has it? What sort of vans and 
what sort of horses ? What sort of trade ? A teamster doing busi- 
ness on a fine level macademized road, with big, heavy vans, and 
heavy draft horses, can work at a profit, and underbid a carrier 
with old vans and poor horses, working on roads of heavy grade. 
So, for example, a railroad, other things being equal, with a water 
grade like the New York Central, has a tremendous advantage over 
an up and down grade like that of the Erie. The Illinois Central 
can do business much more cheaply than the Missouri Pacific. A 
road with a magnificent equipment like the Lake Shore can under- 
cut a poorly equipped road like the Nickel Plate. 

The initial facts that we wish to know of a railway then are, 
What sort of a road has it ; what is its traffic ; does it get good rates ? 
When we know what business it does, what its earnings are, then 
we shall ask how it is capitalized, what are the fixed charges these 
earnings have to bear, what is there left, and the amount of stock 
which has to share the surplus. We shall ask if its earnings are 
stable; if the maintenance is adequate, if the policy of the road is 
conservative, if its management is good or bad. When we have 
done all this, then we shall go into the market, ask the prevalent 
rate of money, and by a simple rule of thumb, we shall know, in a 
broad way, whether the stock is cheap or dear. 

Yield and Value. 

But such would be an exhaustive analysis, which few would 
care to make. And, in reality, there are, in the end, only three or 
four main facts which the investor wishes to know. If he is pur- 
chasing bonds he will want to know their price, their yield, their 
security. The case is not radically different for the purchaser of 
stock; but here he will look more to earnings, more to the future; 
in the primitive sense of the word, he will speculate a little on futuiv, 
dividends and future values. 

The investor in stocks takes a larger risk than the purchaser of 
bonds. Therefore, he will expect a higher rate of interest, a higher 
return for his money, and he will make his purchases not merely 
with an eye to dividends, but to increment in the value of his hold- 
ings as well. It follows, therefore, that the purchaser of stocks will 



20 INTRODUCTION 

wish to know more about the condition of the road, its management, 
its prospects. He will consider the price of the stock, the immediate 
return on his money, and the chances for enhanced value. 

We may briefly pass in review the more important items which 
he must consider. 

The Value of a Road. 

Obviously, the first question that an intending purchaser of 
railway securities would like to have answered is the real or approx- 
imate valuation of the property. If, for example, a man wishes to 
buy an interest in a grocery store or a wayside inn, he reckons up 
the value of the land, buildings, its past earnings, and the possible 
appraisal of the good will of the business. 

With a railway it is more difficult. One may frequently read in 
the financial journals or in the literature sent out from investment 
houses that such and such a road, as for example, the Mexican Cen- 
tral or Canadian Pacific is "very cheap," because it is "selling" 
for only so much per mile. For the most part, these reckonings have- 
only mediocre value ; frequently they are utterly misleading. 

It is customary to take merely the nominal capitalization of a 
road, to reckon its bonds at par, the stock at its market value, and 
then to divide the sum so obtained by the " number of miles oper- 
ated." It is rarely that the underlying bonds, guarantees and ren- 
tal contracts are considered. This may lead to perfectly fantastic 
results. For example, the nominal bonded indebtedness of the 
Lackawanna is only $3,000,000, and this, with its $26,000,000 of 
stock, gives a nominal capitalization of only $29,000,000. This, on 
its 770 miles of road operated gives a very low capitalization per 
mile. Upwards of $90,000,000 of underlying bonds, etc., to say 
nothing of the capital stock of leased portions of the system, for 
which the Lackawanna pays $5,000,000 per year rentals, are entirely 
ignored. 

Obviously, if in the comparison of the mileage capitalization or 
mileage selling value of different roads, one has a large accumula-. 
tion of underlying bonds, which are left out of the reckoning, while 
another owns outright every mile of its track, the comparison be- 
comes utterly worthless. 

The subject of capitalization, and more radically still of over 
capitalization, is indeed one of the most baffling questions of railway 
economics. 

Let us take the fore part of the problem and ask, for example, 



INTRODUCTION 21 

What is the mileage capitalization of the New York Central? For 
1906 it reported : 

Stock $178,000,000 

Bonds $230,000,000 

Total $408,000,000 

But in the bonded indebtedness is included 110 millions of col- 
lateral bonds, issued in exchange for stock of the Lake Shore and 
the Michigan Central roads. There were S T / 2 millions of debentures 
employed in a similar purpose. Excluding these, the funded debt 
becomes only $115,000,000. The road actually owned by the New 
York Central is only 807 miles, so that, excluding its Lake Shore 
and Michigan Central purchases, the capitalization amounted to 
$370,000 per mile. 

Turning to the balance sheet, however, we find an entry of 
"sundry stocks and bonds" whose cost valuation was $143,000,000. 
Deducting the $110,000,000 considered above, this leaves $33,000,- 
000 more to be taken from the nominal capitalization. 

But New York Central stock in the fiscal year 1906 sold at 
an average of 40% premium (i.e., at 140), which would add $71,- 
000,000 to its "selling" value, still leaving a net of rather more than 
$300,000 per mile. This is an enormous sum, considering that the 
average capitalization of all the railroads in the country is only 
about $66,000 per mile. 

As a matter of fact, the New York Central operates directly 
3,700 miles of railroad. By dividing by this figure instead of by 808, 
the amount per mile naturally is cut down to less than a quarter. 

We may go still further. The New York Central operates 1,300 
miles of double track and 700 miles of third and fourth tracks, to 
say nothing of 2,300 miles of siding, giving a total of 8,100 miles. 
But if, in estimating the capitalization, we are to consider mileage 
operated, and not mileage owned, obviously we must include the 
stocks and bonds of the leased lines. Turning to the income account, 
we find that the rentals of the leased lines exceeded the interest of the 
funded indebtedness by more than $1,000,000. This is just as much 
of a "fixed charge" in the operation of the road as its nominal funded 
debt. It is exceedingly difficult to get at the valuation of these 
leased lines. Their capital stocks amounted to more than $90,- 
000,000, their funded debt to more than $110,000,000, at last ac- 
count. This would add a total of $200,000,000 to the actual capi- 



22 INTRODUCTION 

talization of the road. The operating company actually pays an 
average of over 4^4% in rentals on this sum. Roughly then, we 
may state the net capitalization of the road at around $460,000,- 
000. This would represent a capitalization of over $120,000 per 
mile of road operated. 

The current premium on various stocks and bonds of the system 
would probably increase this amount by $100,000,000, which would 
place the selling value at around $140,000 per mile. 

This is still a high figure. It is probable that the 8,000 miles 
of track and sidings of the road, with present equipment, could 
easily be replaced for $30,000 per mile, or around $250,000,000. 
Even allowing $100,000,000 more for right of way and terminals, 
the selling value would represent a premium of much over 50%. 

It is clear that this method can lead to no results of any prac- 
tical interest to the investor. What he wants chiefly to know, here, 
is the earning power of the capital represented, and this can be 
reached in a very simple way. This consists in estimating, as nearly 
as possible, the actual net capitalization of a road, and then finding 
what percentage the net earnings represent upon this amount. If 
the percentage is low, the capitalization obviously is high, and 
vice versa. But in order to determine this figure, we must first of 
all know 

What Is True Capitalization. 

Enough has already been said to make it clear that the nominal 
capitalization of a road often in no wise represents its actual capi- 
talization. It is evident, for example, that a holding or leasing 
company might be formed to take over the Pennsylvania or New 
York Central, and pay simply a rental. The rental might be en- 
ormous ; the amount of underlying stocks and bonds would corre- 
spond ; but the capital of the leasing company might be small. To 
some extent this is actually realized with a number of roads. 

On the other hand, the apparent capitalization of the company 
might be enormous compared with the traffic earnings of the mile- 
age operated, while a large part of this capital might be represented 
in the securities of other roads. Obviously, to reach a just estimate 
of capitalization, the value or cost of these securities should be 
deducted from the estimate of the gross. In the endeavor to reach 
something like a just estimate of capitalization the following plan 
has been adopted in this work : 

The nominal amount of stocks and bonds of a given road has 



INTRODUCTION 23 

been added together; then rentals paid have been capitalized at 4% 
and these two amounts added together. It is obvious that in makmg 
a lease of another road, this leasing usually being the equivalent 
of an absolute guarantee, the leasing lines will pay something like 
the prevailing savings bank rate of interest on the actual earn- 
ings of the line. In general practice the present day leasing basis 
is about 4%. We have then simply to take the rentals paid on 
leased lines, multiply this by 25, and then add this amount to the 
nominal issue of stocks and bonds. This gives an estimate of what 
we may term Gross Capitalization. 

We have then merely to turn to the General Balance Sheet, 
and find the Securities Owned, together with the amount at which 
they are carried on the books of the company. This latter figure 
is generally the cost price of the securities. If the investment has 
been judicious, it will oftentimes happen that the actual value of 
the securities is very much greater than the book value. Wherever 
this can be determined, it will be indicated. On the other hand, 
if the investment be large, it is probable that, as with any other 
business, some of the securities will not have turned out well. It 
may even happen that their book value may be excessive. But 
in a general way, with the excellent management which character- 
izes American roads, it is safe to say that the book valuation is 
generally below rather than above the actual valuation, and we 
shall not go far wrong in considering this book valuation as a 
conservative figure. 

In order to determine the Net Capitalization, then, we have 
only to deduct the value of the securities from the estimate of 
Gross Capitalization as above obtained. This will give us some- 
thing like the actual amount of capital invested in the mileage of 
road operated. If we now divide the figure so obtained, by the 
number of miles operated, we shall have an estimate of the Net 
Capitalization per mile, and this may be used as a basis of com- 
parison with that of any other road desired. 

"Mileage Operated." 

It is evident, however, that the capitalization of a double track 
road will be, on the average, very much higher than that of a 
single track line. In making a fair comparison, therefore, we must 
consider the miles of extra main track owned or operated. The 
simplest way is to reduce this figure to a percentage of the first or 
main track. In stating the "mileage operated," in a railway report, 



24 INTRODUCTION 

it is the total length of a single line operated which is given, the 
mileage of extra track being disregarded. With this fact, however, 
clearly in mind, and with the corresponding figures in hand, we 
shall be able, if we like, to compare the capitalization of the Penn- 
sylvania with the Texas Central or any other line. 

But it is further evident that a road doing a large business, 
earning ten or twenty thousand dollars per mile, in gross, will be 
capitalized at a much higher figure than a small road earning a 
thousand dollars or so per mile. There is, however, a simple way 
of reducing the capitalization question to a very clear basis. That 
is, comparing the Net Earnings with the estimated Net Capitaliza- 
tion, and finding what percentage the Net Earnings represent, on 
the figure thus found. 

Taking all the roads of the United States together, it is found 
that the Net Earnings represent about 6% on the Net Capitalization. 
This figure is not absolute. All roads do not follow identically 
the same method of accounting, and this introduces some element 
of error. Probably if the actual figure could be reached, or com- 
puted, it would be slightly higher than this. But in a large way 
it may be said that the railroads of the United States are capital- 
ized on a basis of 6% of their Net Earnings. This is a low figure 
and it means that the railway capitalization of the country is rather 
high. In comparing the capitalization of a given road obtained 
on this basis, we say that if the percentage falls below this figure, 
it is over-capitalized, and it will be in the favor of a road if this 
percentage is higher than 6%. 

It might be expected, however, that the older roads like the 
Pennsylvania and the New York Central will have a very much 
higher capitalization than newer lines, especially in the West. As 
a matter of fact, we shall see that there is here no general rule, 
and that old established lines like the Delaware and Lackawanna 
may be capitalized on a much lower basis, that is to say, show a 
much higher percentage of net earnings on net capital than even 
some Western prairie roads whose construction was cheap and 
rates high. 

It is needless to remark that there is a very distinct relation- 
ship between earnings and capitalization, and that in general, the 
higher the earnings compared with the capitalization, the solider 
will be the securities of the road, the larger its dividends, the higher 
the price of its stock. 



INTRODUCTION 25 

Style of Capitalization. 

There is, however, an item quite as important to consider as 
the simple question of capitalization, and that is the form which 
this capitalization takes. It is evident enough that the larger 
the share of the outstanding securities represented by bonds or 
by leased lines whose securities are guaranteed, the larger will 
be the proportion which the Fixed Charges consume from the Sur- 
plus Earnings. Conversely, the larger the amount represented by 
stock, the better the position of the road to meet dull times. In 
considering the value of a given stock, or bond, therefore, we 
shall consider this proportion; we shall want to know what per- 
centage of capitalization is in stock, and what percentage is in 
bonds. 

Going a step further, we shall ask what are the Fixed 
Charges, including in these Fixed Charges rentals and guar- 
antees. We shall add to the Net Earnings the amount of "other 
income," that is to say, the sums derived from interest on se- 
curities held, from properties leased, or rented, and from various 
sources, and in this way we shall obtain an item known in the 
railway reports as Total Net Income. Then we shall find out 
how much of this Total Net Income is consumed by Fixed 
Charges. If it is less than half we may be sure that the security 
of the stocks and bonds is high. If it is much more than half, 
by that much we shall understand that the absolute security of 
the bonds (and the securities of the leased and rented lines), is 
impaired. In other words, we may compute the Factor of Safety 
for these underlying securities. If, for example, as in the case of 
the New York Central, Fixed Charges, rentals included, consume 
about 65% of the Total Net Income, we shall see that the Factor 
of Safety for New York Central bonds and for the securities of 
the lines leased or guaranteed by the New York Central, is ap- 
parently low. If the Total Net Income of the New York Central 
fell 35% in bad times, with no decrease of charges, the ability 
of the road to meet the interest on its bonds, its rentals and its 
guarantees, would be in danger. The Factor of Safety of the 
underlying securities of the New York Central in the sense here 
indicated, would therefore be only 35%. As a matter of fact, it 
is much higher than this, in virtue of its large equity in other 
roads. 

If, on the other hand, as in the case of the Delaware and 
Lackawanna, Fixed Charges, rentals and guarantees included, 



26 INTRODUCTION 

consume only 30%, or 40% of the Total Net Income, it would be 
under only the most extraordinary conditions that its ability to 
pay would be impaired. Its Factor of Safety is high. In general 
the investor who seeks absolute security then, will avoid roads 
with a low Factor of Safety, and choose those where it is large. 

This same line of reasoning may be followed out as to the 
margin for dividends, alike for preferred or for common stock. 
When we have deducted from the Total Net Income the Fixed 
Charges, including rentals, we have the item known in the re- 
ports as "Surplus." If the amount remaining over after Fixed 
Charges have been paid is relatively small, it is obvious that the 
dividend will be precarious and the stock value correspondingly 
low. On the other hand, if the surplus is relatively large, we 
shall know that the road will be able to stand a considerable 
period of depression and still be able to meet its dividend pay- 
ments. 

We may compute the "Margin of Safety" for stock dividends 
in precisely the same way as the Factor of Safety for bonds. As 
a rule the dividends on the preferred stocks are limited to a fixed 
sum. The speculative value of such limited dividend stocks is 
therefore much smaller than in the common, or in the cases 
where the preferred may share equally with the common. As a 
rule the preferred stocks are chosen by investors who wish a 
greater degree of safety and are content with a smaller yield. 

If now, after Fixed Charges have been paid, and the dividend 
on the preferred as well, a large surplus still remains, the Margin 
of Safety for the preferred dividends is large. This is very simple 
to compute, and the investor is then able to judge for himself 
as to the degree of security which his money enjoys. 

Equities Owned. 

It very often happens, however, that the abstracts of their 
condition drawn up by the railway companies do not show their 
actual financial strength. Let us take an example. The New 
York Central issued bonds at 4% and exchanged these for the 
stock of the Michigan Central and Lake Shore roads. These 
stocks pay a certain dividend and go to offset the interest pay- 
ment on the bonds. In the actual case of the New York Central, 
the dividend returns were but slightly larger than the amount re- 
quired for the interest. When, however, we come to examine the 
earnings of the Michigan Central, and the Lake Shore, we find 



INTRODUCTION 27 

that enormous sums are being set aside from earnings for im- 
provements, and that the earnings are mounting rapidly with no 
corresponding increase in capitalization ; in other words, a large 
proportion of the earnings that might otherwise be available for 
dividends is being put back into the road — "plowed in," as a 
farmer would say. It goes without saying that, given a judicious 
use of the money so employed, the value of the New York Cen- 
tral's holdings in these two roads is rapidly increasing. When 
the improvements are completed, these roads will be in a position 
to pay very much higher dividends than they now pay. In other 
words, the New York Central's "equity" in these roads is con- 
siderable. , , 

All this must be considered in endeavoring to estimate the 
value of a road's holding of securities. It is this, for example, 
which accounts for the fact that while the New York Central 
nominally earns a little more than sufficient to pay its dividend, 
its stock has sold at a high figure, and its fixed interest securi- 
ties been coveted by investors. Owning these subsidiary com- 
panies, as it does, the Central, when it so desired had merely 
to increase the dividends which they pay, to swell its sur- 
plus income sufficiently to meet all charges and dividends as well. 
A very large number of American roads are huge holding com- 
panies, and it is for this reason that the item of "Equities," be- 
comes one of the most important which the investor has to 
consider. 

" Concealed Earnings." 

There is the further item which may be considered here, and 
that is the matter of earnings carried under an excess of expense 
account. Nominally the surplus shown by the Lake Shore for 
1905 amounted only to 8.9% on the common stock. As a matter of 
fact huge sums were set aside from the earnings for improve- 
ments, so that the actual surplus earned, even after adequate 
maintenance charges, was nearly 23%. The last six or seven 
years have in general, been years of marvellous prosperity for 
American railroads, and it has become the usual practice of the 
roads to set aside such sums, rather than pay them out in the 
form of dividends. This is a highly conservative policy and has 
enormously enhanced the safety of railway securities as invest- 
ments. It likewise means that the roads which follow this policy 
are in an immeasurably better position to meet a series of bad 



28 INTRODUCTION 

years and long depression such as followed 1893. It means that 
a road, in proportion as its earnings have been turned back 
into the road itself, is in a position to continue its present dis- 
bursements even though lean years should come. Should earn- 
ings fall off, improvements could be suspended and maintenance 
charges cut down, without in any way crippling earning capacity. 
When we come to examine the conditions of the several roads 
we shall look very carefully to these questions of "concealed 
earnings," knowing that in proportion as they are found, the 
stock of a road presents an attractive investment. 

Affiliations : " Community of Interest." 

There is yet another "equity," of a much vaguer but none 
the less very tangible sort which a road may have, and that is 
its friendships. Railways do not escape from the rigors of very 
keen and oftentimes bitter competition. Ten or fifteen years ago, 
great battles between the railways, — "rate wars" as they were 
called, — were a familiar fact ; the results were often drastic to the 
last degree. Rich roads were forced to suspend their dividends. 
Even vast properties like the Baltimore and Ohio were driven 
into bankruptcy. Today these rate wars are all but unknown. 
This has come about through the introduction of the well-known 
"Community of Interest" idea. Prohibited from "pooling," or 
having agreements to maintain rates, it was open to the railways 
to purchase each others securities, to interchange directors, and 
to bring competing lines as far as possible under much the 
same ownership. The lead in this plan of combination was taken 
by the New York Central and Pennsylvania lines. It involved 
extensive purchases of the stocks of competing roads, and as this 
was often in conflict with the laws, their object was attained 
sometimes in extremely roundabout ways. Thus, for example, 
the Pennsylvania gained control of the Baltimore and Ohio; the 
New York Central bought the Lake Shore ; in its turn the Balti- 
more and Ohio divided with the Lake Shore the control of the 
Reading and other lines ; the Reading acquired a controlling in- 
terest in the Central of New Jersey, and in a similiar way the 
Lehigh Valley, the Hocking Valley, the Chesapeake and Ohio, 
the Norfolk and Western and other roads were brought more or 
less into a community of ownership. Sometimes the control of a 
road is not corporate but personal. Thus, the stock of the Dela- 
ware and Lackawanna is not owned extensively by any par- 



INTRODUCTION 29 

ticular road, but its control lies with the Vanderbilt and Stand- 
ard Oil interests, so that its ownership is much the same as that 
of the New York Central. 

This communal idea has been more or less carried out over 
the whole country, so that the interlacing of interests practically 
involves all the larger roads. These affiliations are of very keen 
interest to the investor. But they are not always easy to trace, 
from the simple fact that the interlocking of interests is so ex- 
tremely complex, and from the fact that the policy of a road may 
be dictated in a very roundabout way. 

Thus, for example, the control of the New York Central is 
supposed to rest absolutely with the Vanderbilts. Nevertheless, 
Standard Oil holdings are understood to be heavy, and besides 
two representatives of this interest, its directorate includes also 
1. Pierpont Morgan, and George F. Baker, president of the First 
National Bank of New York City. This control holds over all 
the Vanderbilt system and the Chicago and North Western, and 
to all intents over the Delaware and Lackawanna as well. 
Mr. Morgan is regarded as in practical control of the Erie, and 
the Erie in turn owns the New York, Susquehanna and Western. 
Also a director in the Erie, and very closely associated with Mr. 
Morgan, is James J. Hill, whose control of the Great Northern, 
the Northern Pacific and Chicago, Burlington and Quincy is 
absolute. 

Again, Standard Oil interests, with the Smith estate, are sup- 
posed to control the Chicago, Milwaukee and St. Paul. Repre- 
sentatives of the Milwaukee and St. Paul and of the Chicago 
North Western are to be found on the directorate of the Union 
Pacific. The Union Pacific in its turn owns the Southern Pacific. 
Thus it is the Vanderbilts on the one hand, the Standard Oil interests 
on the other, which stand in the middle between the "Hill lines," 
and the "Harriman lines." H. C. Frick is another director of 
the Union Pacific, prominently interested also in the Pennsylvania, 
Reading, in the Norfolk and Western and in the Atchison. The 
Union Pacific has large holdings in the Atchison ; it openly owns a 
large interest in the Baltimore and Ohio and in the Illinois Central. 

The banking house of Kuhn, Loeb and Company is no 
longer represented on the directorates directly by its members, 
but it is known to be one of the most powerful influences in rail- 
road affairs in the country, and has latterly come to be regarded 
as especially influential in the management of the Pennsylvania. 



3d Introduction 

In a similar way it might be shown how the "Gould lines/* 
the "Rock Island" interests, the Hawley railroads, the Atlantic 
Coast Line system, and other lesser lines are equally involved in 
this network of affiliations. 

The practical effect of this community of interest plan, by 
doing away with disastrous rate wars, and eliminating to some 
extent, harmful competitive building, has been to give railway earn- 
ings, and correspondingly railway securities, a degree of stability 
which they never before enjoyed. 

Not all of the roads, however, are closely associated in this 
community of interest. Some of them are quite independent. The 
securities of these independent roads can hardly be so solid as the 
others. In any event, it will be interesting in each case to note 
what are the affiliations of the road, and thus determine to what 
extent friendly offices would be extended to smooth over differences 
— should differences arise. 

Management. 

Finally, there is a vaguer asset than any yet considered, which 
is none the less a vital one. This is management, and more widely 
still, the history of management. 

It is one of the most curious facts of railway history, but one 
exemplified fully enough, that careful arid conservative conduct 
of a road tends in some sense to perpetuate itself. The law of her- 
edity, so strong in the common affairs of life, obtains in some sense 
among railways also. It is not for nothing that the Vanderbilt 
lines have been under the control of a single family for more than 
half a century. It is not for nothing that the Pennsylvania has 
never failed to pay a dividend for more than fifty years. It is 
not for nothing that roads like the Reading, the Erie, the Union 
Pacific, have been the footballs of stock- jobbing speculators, 
and dishonest directors. The ownership of a road, the personnel 
of its management, may change absolutely, yet it is curious to note 
how amid all these changes its character for good or evil will some- 
times survive. 

This is why the history of a road is not without its importance 
to the intelligent investor. If it has been through bankruptcy, there 
were ample reasons why; and it will be of interest to inquire what 
these reasons were, and to what extent they have been eliminated. 

Conversely, if roads like the New York and New Haven, the 
New York Central, the Pennsylvania, the Delaware and Lacka- 



INTRODUCTION 31 

wanna, the Chicago & North Western, have been able to survive two 
or three periods of depression and bad earnings, it will not be 
unreasonable to suppose that they will maintain their clean records, 
and that they will be in better shape than other roads to meet sub- 
sequent depressions, which come as inevitably as the years of crop 
disaster. 

To be sure, it will not do to accept the history of past per- 
formance blindly, or without question. There have not been lack- 
ing roads, like the Chicago and Alton, whose securities have been 
regarded as gilt-edged, but which have suddenly been found to be 
greatly inflated. Nor will it do to damn a road or avoid its securi- 
ties, simply because it has known difficulties or had dishonest mana- 
gers in the past. The vital question is, of course, whether it is well 
managed now. 

For this reason it will be of interest to note who are the con- 
trolling spirits of a road, and who are the executives actually in 
charge of its management. The latter is of less interest to the inves- 
tor, for in a general way it may be said, as Napoleon said of armies, 
' There are no poor soldiers, there are only bad generals." The 
great army of railway men in the United States has made a record 
of skillful and energetic management which cannot be found any- 
where else in the world. They are in the main striving to the utmost 
to run their lines efficiently and economically, endeavoring to make 
the best possible record for themselves and the lines which they 
conduct. 

It is the heads which we should look to. The investor will ask 
himself what is their standing in the financial world ; what enter- 
prises they are engaged in, and if he finds that they have engineered 
huge stock- jobbing operations, he will avoid the securities of their 
roads. He will know that if they suddenly jump the dividends in 
an unusual way, simply for the purpose of turning a quick profit in 
Wall Street, he may equally expect that these dividends may be 
suddenly cut when it suits the stock-jobber's purpose. 

New Capital and Old. 

There is another item which the investor will do well to con- 
sider with some care, and that is the recent increase of capitaliza- 
tion of a road. If in the last five or six years the railway has been 
issuing large quantities of securities, he will ask how the money so 
obtained has been invested, and whether it is yielding an adequate 
return. He will look at the corresponding increase of gross earn- 



32 INTRODUCTION 

ings, and if this increase is not in evidence to the extent it should 
be, he will turn to the account of securities owned, and find out 
if the money has been put into the stocks and bonds of other lines ; 
and with this, the item of "other income," showing the return 
which these investments yield. If he finds no adequate response 
to the new capital, in either the one item or the other, he may fairly 
conclude that the capital account of the road is simply being wa- 
tered, and he will take due account of this in considering value. 

The conclusion should not be hasty. It may be that the road 
is undertaking large improvements which have not yet begun to 
tell to their full strength in earnings. This is the case undoubtedly 
with the enormous expenditures which the Pennsylvania Railroad 
has made within the past few years, in gaining a terminal station on 
Manhattan Island and pushing its tunnels through to Long Island. 
Nevertheless, the annual accounts should show the amounts of these 
expenditures, so that the investor may know what deductions should 
properly be made; and this, it may be remarked, is something that 
the Pennsylvania has not done very clearly. And here, as in every 
other instance, the investor will know that his money is safe in 
proportion as the road follows a policy of publicity and absolute 
frankness; that it is unsafe in proportion as adequate reports are 
for one reason or another withheld. 

The Profit of Improvements. 

One item to consider: whether the improvements or new 
constructions are to be carried out when the general level of 
prices, of railway materials, of labor and of supplies, is high or 
low. It is said of the Atchison that it took advantage of a depres- 
sion, along in 1896-7, to take up a great quantity of light rails and 
substitute heavy steel rails at low prices ; yet such was the sub- 
sequent rise in the price of iron that it was able to pay for this 
replacement from the proceeds of the old rails. 

If, on the other hand, a new line is to be built, a heavy recon- 
struction is undertaken, when commodity prices have risen 25 to 
40%, as they did in the ten years preceding 1906, if labor is very 
dear, the price of railway supplies high, obviously the capital so 
invested will yield from a quarter to a third less than when em- 
ployed at the lower levels, disregarding, of course, the question 
of rates or the amount of business. The point is simply that rail- 
roads built or improvements made in flush times at high prices 
cannot expect to earn either in good times or in bad times the same 



INTRODUCTION 33 

rate on the capital employed as when the capital is able to buy 
goods and labor at 25 or 40% less. 

Character of Traffic. 

There is an old adage about not putting all one's eggs in one 
basket. If a road is dependent for its prosperity upon the pros- 
perity of a single industry, like coal-mining or wheat-raising, it 
goes without saying that there will be a larger element of risk in 
its securities than as though its traffic were distributed over a great 
number of articles. A long strike in the anthracite or bituminous 
coal regions can send down the stocks of the Lackawanna, or Read- 
ing, or Chesapeake and Ohio, or Norfolk and Western, and other 
lines; can very heavily impair the earnings of these lines and 
threaten their dividends. A long drouth in the corn fields or the 
wheat fields could vitally affect the prosperity of the " Grangers," 
as in Wall Street parlance, the Western roads are known. 

It is for this reason that the investor will look into the charac- 
ter of traffic on a line, find out what portion of its earnings is from 
passenger service, what from freight service, and what are its other 
resources; he will inquire whether the items of freight are widely 
distributed as to tonnage or whether as in the case of the Pennsyl- 
vania, and more distinctly with the " Coalers," coal and coke make 
up more than 50 % of the tonnage hauled. Every properly conr 
structed railway report contains this information. 

Stability of Earnings. 

The next item to be considered is the degree of stability which 
the earnings of a road have shown through a series of years. In the 
present work this item will be carried back ten years. It is not, 
in truth, of very much value to pursue the question further than 
this. The conditions under which the road operates may change so 
considerably as to make further comparison of little worth. 

Nevertheless, it is to be said that the showing within the last 
ten years is to some extent deceptive, and the investor will do well 
to be upon his guard. The last ten years have been, for the whole 
country, years of almost unexampled prosperity, and in this pros- 
perity the railways have shared in the highest degree. The year 
of 1896 was the end of a long period of declining earnings and 
declining values. In the intervening period almost every road in 
the country has shown an enormous increase in its gross earnings, 
even when these earnings were reduced to a mileage basis. 

3 



34 INTRODUCTION 

This prosperity has been especially accentuated within the last 
four or five years. It is scarcely possible that earnings can go on 
increasing at the same rapid pace. They may not seriously decrease, 
but it would be without precedent in economic history if the fat 
years should not be succeeded by the lean years. It is for this 
reason that the mere fact of a large increase in mileage earnings 
is not in itself absolute evidence of the stability of a road. The 
increase is to be compared with the corresponding output of stocks 
and bonds, and with the degree of prosperity which the country has 
enjoyed. It may be that the earnings have increased much more 
rapidly than the capitalization. If they have not it will be well for 
the investor to inquire why. 

Maintenance. 

It is to be said, however, that our American railroads have util- 
ized their prosperity with splendid foresight. Great earnings have 
not been employed to maintain huge dividends. No fact testifies 
more to the conservative character of American railway management 
than that dividends have not tended to increase with anything like 
the rapidity which the earnings may seem to justify. Instead of 
charging improvements to capital account, as is the habit of 
British railways, a tremendous line of betterment work has been 
carried out and charged either directly to operating expenses or 
drawn from earnings in the form of an improvement fund. 

The result of this policy is that while English railways have 
practically reached the limit of their capitalization, and they are, 
in some sense, nearly bankrupt, as far as their ability to issue new 
capital is concerned, American railways were never in so strong a 
financial position, nor better able to meet a turn of the tide. 

In examining the maintenance accounts of separate roads, we 
shall, as is customary, reduce these to a mileage basis, and compare 
this maintenance with the so-called " traffic density," that is, the 
number of tons carried one mile per mile of road operated. When 
we have done this, we shall find, in general, that maintenance 
charges, alike for Way and Structures and for Equipment, have 
increased very rapidly, usually much more rapidly than the traffic 
itself. This is a good showing. Indeed, so far as this policy has 
been pursued, earnings to some extent have been concealed in 
the maintenance account. It has become the general habit in 
discussing railroad reports to analyse this item carefully, and 
determine this amount of concealed earnings. 



INTRODUCTION 35 

But this, in considering the charges of a single road, is apt to 
be misleading. If one line were thus to conceal large earnings each 
year, while its immediate competitors did not, it is obvious that this 
might justly be considered as part of the assets of the road. But 
if the policy is equally pursued by all lines, there is no advantage 
to any single road, and it will be misleading to weigh this item too 
heavily. Thus it has been the policy of this book not to consider 
so much what an individual road has spent over and above the 
actual needs of maintenance, but to compare it with its competing 
lines, and note whether its charges have been relatively high or low. 

In comparing maintenance charges, even when reduced to a 
mileage basis, it should always be taken into consideration whether 
these charges apply to practically a single track, or whether the 
road has a considerable percentage of extra main track. So for 
example, it would be foolish to compare the maintenance of a road 
with a large amount of double and other track, like the New York 
Central, with a single track line, let us say like the New York, 
Ontario and Western. In the same way a line like the New York 
and New Haven with a very large percentage of passenger earn- 
ings, and a comparatively low freight traffic density, will require 
a relatively larger sum for maintenance of way than a road whose 
earnings are chiefly from freight. Moreover, it is obvious that 
different roads are very differently situated as to the cost of vari- 
ous items of maintenance. On one line labor may be cheaper, on 
another ballast, on a third, lumber and ties, and so on. 

In a general way, too, eastern roads will have a higher stan- 
dard of maintenance, will be better kept up, will have finer stations, 
in the large centers of population, their expenditures will be greater, 
than with roads running through sparsely populated territory. The 
only basis of comparison, of course, is with roads as closely alike 
in their traffic and their territory as possible. 

Improvements. 

Again, all of the railways do not pursue the same bookkeeping 
methods. Many lines, as conspicuously the Vanderbilt lines, main- 
tain a separate improvement account. What is considered legitimate 
maintenance is charged directly to the operating account, while the 
extraordinary betterments are paid from a separate fund, even 
though this fund is drawn in its turn from the surplus earnings. In 
comparing maintenance charges this fact must be borne in mind. 



36 INTRODUCTION 

It may be well to note, likewise, that different bookkeeping 
methods may make a great difference in the amount of Net Earn- 
ings shown and correspondingly in the items of Total Net In- 
come, and even in some cases in the item of Surplus. It will 
obviously make a considerable difference as to whether the im- 
provement fund is deducted from the net earnings in front of the 
Total Net Income, as in the case of the Vanderbilt lines or the 
Delaware and Lackawanna, or whether the amount is charged 
off from the nominal surplus, as is the procedure of the 
Pennsylvania. 

In order to show conditions as nearly as possible, in this work, 
where such special improvement appropriations are made they 
will be separately tabulated through a series of five or six years. 

Fixed Charges. 

Most of the roads have other sources of income than their 
own traffic earnings. When this Other Income has been added 
in, we have the amount of Total Net Income. From this 
amount is deducted the interest on the Funded Debt and on float- 
ing indebtedness, taxes and sundry special charges. In most railway 
reports rentals on leased lines are included in the item, but this 
is not true of all. In the present work it may be understood that 
rentals are invariably so included, and considered as part of the 
Fixed Charges which the road must meet. 

Surplus Earnings. 

When all of these deductions have been made, there remains, 
where no deficit is shown, the surplus available for the arbitrary 
use of the directors of the road. This Surplus may be, and to the 
credit of the managements often has been turned back in part or 
in whole towards the improvement of the property. The tradi- 
tional policy of the Pennsylvania, for example, has been, "a dollar 
for improvements, a dollar for dividends." Latterly this policy 
has not been strictly adhered to ; but it may be taken as a model 
procedure, towards which the best railroads have more or less 
striven. Where it has been followed, the investor may be sure 
that his funds are safe, and that his interest and dividends are 
reasonably certain. 

It should be noted, however, that the bookkeeping systems of 
the various roads differ so widely that it is not always easy to deter- 
mine how far this conservative policy has been pursued. For 



INTRODUCTION 37 

example, the management of a line may keep its maintenance 
charges low, with the intent of showing a large surplus, and deduct 
from this a large appropriation for improvements. On the other 
hand, a road may heavily surcharge its maintenance and set aside 
a considerable improvement fund as well. It is obvious that a 
management which pursues this latter policy may be trusted in the 
highest degree, and the securities of such a road are eagerly 
sought by careful investors. It is for this reason that these items 
should not be considered singly, but in the aggregate, and that the 
investor should endeavor to reduce the maintenance and improve- 
ment charges to a uniform basis, in order that his comparisons 
may be just. 

Profit and Loss. 

It is the general custom to reserve for deduction against the 
surplus shown various items such as contributions to the sinking 
fund, payment of car trust and similar items. Some of these are 
to all intents a fixed charge, as for example, car trust payments, if 
equipment so obtained is to be paid for from earnings and not 
charged to capital account. It is, after all, a mere matter of book- 
keeping, and the individual reports ought not to deceive the investor 
by misleading him as to the true surplus earned. It may readily 
deceive him in case he does not see the individual reports but relies 
simply upon second-hand information. In the present work it has 
been the general policy to show the surplus after such payments, 
but before the payments to special improvement funds, etc. Here 
and there, for special reasons, this has not been invariable. 

When from the surplus all charges and dividends have been 
deducted, there usually remains an amount sometimes called the 
"net surplus," which customarily goes to the credit of Profit and 
Loss. Usually this amount is relatively small ; sometimes, as in the 
case of the Great Northern in 1906, it may be very considerable, 
amounting to $5,184,569. 

Nominally the Profit and Loss account, which is carried on the 
General Balance Sheet as a liability, is represented by items in the 
assets, of corresponding amount. Theoretically this account should 
represent the fund from which the road might draw in case of 
adversity or need. As a matter of fact it is often a merely nominal 
amount, and is represented in the assets by such vague entries as 
"Cost of the Road," etc. It is for this reason an item which may 
have much meaning or little. 



38 INTRODUCTION 

Current Conditions : General Balance Sheet. 

The main items to be found in the balance sheet which the in- 
vestor will wish to consider are, on the credit side : 

Securities Owned, 
Advances to other lines, 
Current assets, 
and on the Debit side : 

Current liabilities. 

The items of cost of the road and of cost of equipment are so 
entirely a mere question of bookkeeping that they again may mean 
much or may mean little. Some roads like the Lake Shore or the 
Louisville & Nashville, years ago closed this account and all im- 
provements have been charged directly to earnings. 

The item of advances to other lines, usually to leased or con- 
trolled lines, should in general represent an available asset, and 
may be so considered. Sometimes they are entered among the open 
accounts, sometimes separately. Strictly speaking, they are not, 
usually, a quick or "current" asset. 

Current assets may or may not include supplies and materials 
on hand. In any event these may not properly be considered 
quick assets in estimating the company's working capital. 

The Current Liabilities should include all open accounts. The 
chief item that should be looked to is the question of floating debt, 
and this in general should not be large. 

The Current Liabilities ought in general to be much less than 
the current assets and the difference between the two may be con- 
sidered in general as the company's available working capital. Where 
the current liabilities exceed the current assets the road is not in the 
condition in which it should be, unless there be special reasons, which 
in any event should be carefully looked into. 

Dividend Record. 

In the present work an endeavor has been made to show the 
dividend payments alike on preferred and common stocks through 
a long series of years. It in no wise follows that because a road has 
paid dividends steadily for the last ten years or even for half a cen- 
tury, that it will pay them next year; but a fine dividend record in 
general presupposes good management, and creates a favorable 
prejudice as to the future; and certainly nothing better represents 
proper capitalization and good management. It may often happen 
that dividends have been paid when they should not have been, but if 



INTRODUCTION 39 

a record of continuous payments is accompanied by proof of proper 
maintenance and a liberal improvement, the securities of the road 
should possess a high degree of solidity. 

Investment Values. 

It will be seen from the foregoing that a variety of items must 
be considered in endeavoring to determine a reasonable price for the 
bonds and stocks of a road. It is not difficult to see that the prob- 
lem is complex, and it is for this reason that it requires as much con- 
sideration and good judgment as the purchase of any other kind of 
property. 

It is on this account that the estimates given in this work can be 
only of the broadest sort. They are simply opinions based upon the 
face value of the available evidence. The full data from which 
these opinions are formed is given : it should be distinctly understood 
that they are reached by no secret process and represent no special 
or occult knowledge, and in each case they should be carefully 
scrutinized by the investor himself. 

In general the plan has been to discuss the showing which each 
road has made through a series of years, and to show what it has 
earned and what dividends it has paid, and then to consider the 
price which the securities have brought within the last four or five 
years. If there has been no radical change in the situation of a 
road, in its capitalization or in its earnings, it may be supposed that 
these prices will more or less fluctuate within the limits shown in 
these four or five years. If, on the other hand, the earnings of a 
road have been steadily increasing, and its prospects are good, it is 
evident that, other things being equal, prices should rule somewhat 
higher than they have. 

Naturally an investor should guard himself against too implicit 
a trust in the flus-h times of 1900-07. Nor does the fact that 
prices have been run up to very high figures necessarily mean that 
the securities are an attractive purchase, even with a very fine show- 
ing as to the earnings. 

"Manipulation." 

The extraordinary fluctuations in the price of railroad securities 
is, to the uninitiated, extremely perplexing, and undoubtedly pre- 
vents many investors from placing their funds in railway securities. 
In point of fact the matter is, in a broad way, simple. In Wall 
Street and out, there is a large body of shrewd and careful dealers 
in railway securities, who study earnings, who study markets, who 



40 INTRODUCTION 

endeavor, so far as they may, to anticipate the future. Their business 
is to buy when they think stocks are low, and to sell them when 
they are high. 

These thrifty folk often are able to command enormous re- 
sources, either from their own funds, or those from banks, trust 
companies, insurance companies and the like. It is not impossible 
that some of them may have access to the large surplus funds of 
the railways themselves. These funds need not necessarily be di- 
rectly used in this way. The cash surpluses must be banked or 
loaned out somewhere, and once in a bank, it is obvious that they in 
turn are available for loans to individuals, sometimes, it is to be 
feared, to the officers or directors of the road. 

It is undoubtedly true that enormous sums are utilized for the 
purpose of what is commonly known as Wall Street "manipulation." 
Heavy buying of a stock will certainly put up its price, or main- 
tain it when it is high; heavy selling will certainly tend to depress 
the price, and it is a part of the machinery of Wall Street that as 
much money may be made by selling stocks "short," as the phrase 
goes, as by buying them for a rise. 

Selling stock "short," means simply selling shares which the 
seller does not actually own and then borrowing shares from actual 
owners who are willing to lend, with the expectation that the price 
will fall, and that the securities may be bought back for less than 
the selling price, and the transaction thus closed. 

Manipulation takes the form usually of running up or depress- 
ing prices through what is tantamount to "wash sales," that is, the 
manipulators practically buy and sell to themselves. They cannot do 
this openly, but an order may be given to one house to buy, and to 
another to sell, and in this way enormous transactions may be 
effected which in reality represent little or no actual exchange of 
property. 

This manipulation need in no wise harm or disturb the legiti- 
mate investor. So far from that he may shrewdly be the gainer 
therefrom. It is unquestionable, that high prices are habitually 
"made" by large holders of securities, with the intent to unload them 
on other less practiced, or more optimistic buyers. It is equally true 
that prices are habitually depressed far below the legitimate value of 
the securities, for the purpose of inducing weak or frightened 
holders to sell out. But it is open almost as much to the small in- 
vestor to take advantage of this situation as to the makers of it. He 
should not expect to "buy at the bottom," for not even the big 



INTRODUCTION 41 

manipulators are able to do that. He need not expect to sell at the 
top, for not even the manipulators can do so. It is customary to 
make high prices with the expectation of being able to unload at 
something under these figures. 

The Money Market. 

There is in a general way a very good index as to whether 
securities are high or low ; that is the prevailing rate of money. This 
is in no wise absolute, and yet if the investor will scan the fluctu- 
ations in the price of money, through a series of years, he will find 
that in a broad way money tends to be cheap when securities are 
cheap, and dear when securities are dear. This is precisely the op- 
posite of what might at first be expected. One might very well rea- 
son that the lower the price of money, the higher the price of securi- 
ties. In point of fact there are other forces which tend to counter- 
act and to some extent to reverse this primitive law. 

The first is that securities tend to fall when confidence is weak- 
ened. If prices are high, but business conditions are threatening, 
shrewd holders of securities sell out. They convert their holdings 
into cash. The result is a corresponding accumulation of banking 
funds which, if there be no disturbing factors, tends to produce cheap 
money. The more this "liquidation" of holdings, as it is termed, is 
pursued, the farther the prices tend to fall, and the larger the cash in 
the banks. 

On the other hand, when business conditions begin to pick up, 
shrewd and foresighted investors take their money from the banks 
and put it back into securities which they will hold in the expecta- 
tion of a rise. They not only take their own money, but some of 
them will borrow freely from the banks, to purchase securities if the 
latter are low. They will deposit the securities as collateral, and in 
this way the bank funds will be depleted. As the market rises, the 
speculative fever grows ; other people do what the shrewd folk have 
done long before, and in order to obtain money for speculation, they 
bid up the price of money, and as stocks go up, the rate of interest 
goes up. 

It is peculiarly characteristic that the larger buying of the out- 
side public always comes when prices have reached a relatively high 
level. Naturally the result is to force money still higher, so that 
the climax of a stock boom is usually preceded, or at least attended 
by a money "squeeze." Then it is that the shrewder folk sell out 
their holdings, take their profits, and turn the money over to the 



42 INTRODUCTION 

bankers to loan out at high rates. When the big holders sell out the 
market wavers for a time, and then tends to fall. 

The Top of "Booms." 

It goes without saying that all this is attended by a good deal 
of very clever playing upon the hopes of human nature. When those 
who make it their business to buy and sell in this fashion, and more 
especially the big manipulators, make up their minds to buy, it is 
evident that they will not be scattering rose-colored tips, nor giving 
out "bull" interviews. The air will be filled with vague rumors of 
disaster, frightened folk will not be too warmly reassured as to the 
value of their holdings. Prices will sag lower and lower. The 
market will be very "heavy." 

Correspondingly, when these astute folk make up their mind it 
is time to sell out, the future will never appear so bright, rumors of 
great deals, big consolidations, increase of dividends, stock distri- 
butions, and the like will be scattered broadcast. Then it is that 
"prices are surely going higher." 

All this is so simple, so elementary, that it might be supposed 
that the game would have been played out long ago, but that is what 
it never seems to do. But if the outside public is caught, if the in- 
vestor overreaches himself, and fails to sell before the turn of the 
tide, if he sells out when everything looks gloomy, only to buy back 
his holdings at a much higher price, it is certainly no one's fault but 
his own. 

If he will but consider precisely what he would do if he were 
in control of a property or of a business, or wished to secure control, 
he should not have a great difficulty in following the course of 
events in the stock market. 

But he would be a more than foolish man who would suppose 
that "manipulation" may fix prices. It can, and it undoubtedly does 
influence them largely, but no manipulation for a rise can be 
successful in the face of falling earnings, high rates of interest, fail- 
ing banks or poor crops. No manipulation for a fall can be suc- 
cessful when money is cheap, when crops are bountiful, when earn- 
ings are high. Manipulation does not determine values, and if the 
investor follows business conditions broadly and intelligently, there 
is no reason why his investments should show a loss a year after they 
are made. If he is buying in the expectation of a rise, he may have 
to wait, often a considerable time, but if he has used his judgment 
soundly, his reward should come. 



INTRODUCTION 43 

Investment and Yield. 

It goes without saying that what is true of buyers who look 
for a rise, has equal force for those who wish to invest their funds 
simply to secure a good rate of interest. If New York Central's 
stock is selling above 150, and paying a 6% dividend, it is obvious 
that the return to the investor will be only 4%. If at the same time 
a man may take his money to a banker and have it loaned out for 
him on gilt edged securities at 5 or 6%, less the banker's commis- 
sion, he is a foolish man who buys New York Central stock at that 
time. This is always supposing that he is investing and not specu- 
lating, or rather gambling. On the other hand, if a solid 6 or 7% 
stock like Pennsylvania sells down to below 112, as it did in 1903-4, 
and there is every prospect that its dividend will be maintained, the 
investment will yield him above Sy 2 %. 

If at the same time money has fallen, as it often does, to 3 or 
4%, it is foolish to give it to the bankers or money lenders at such 
a rate. He will buy good dividend-paying securities instead. 

This is the A. B. C. of sound investing. 

"Rights." 

The return which investors receive in the form of dividends 
and likewise in the increment in the value of their stock is not the 
only return. There is another, which may equal either of these in 
value, and that is the occurrence of "rights" to the purchase of 
new stock, below the market price, when an increase of capitalization 
is contemplated. 

For example, we may take the recent case of St. Paul. A new 
issue of $25,000,000 was authorized and stock holders of record were 
offered the opportunity of subscribing to the new stock at par, to the 
extent of about 23% of their holdings. When these rights were 
offered both the common and the preferred stock of St. Paul were 
selling in the neighborhood of $200 per share. In other words, the 
stockholders could subscribe to shares at $100 which would pre- 
sumably be worth in the neighborhood of $200 per share as soon 
as issued, to the extent of 23% of their holdings. The effect of this 
was to create "rights" worth from $15 to $18 per share, according to 
the fluctuations of the stock. 

Stockholders were not at all compelled to take up this new 
stock in order to reap the benefits of the opportunity. They might 
sell their rights to another party and as a matter of fact rights are 
habitually dealt in on the Stock Exchange in the same manner as 



44 INTRODUCTION 

stocks and bonds. The issue of these rights or privileges is, with the 
rapid development of our railways, a matter of frequent occurrence 
which may happen with any growing line such as the Great North- 
ern, the Northwestern, the New York Central, and many other 
roads. The value of the rights may, over a series of years, average 
nearly as much as the actual dividend, conceivably more. 

It is customary in speaking of these privileges to consider them 
in fact as to all intents the equivalent of cash dividends, and it will be 
of value therefore to the investor to consider precisely their effect. 
The issue of rights is to all intents a stock dividend, but it does not 
deplete the resources of a road ; it merely dilutes, at least for the 
time being, the road's capitalization. This fact is elementary and yet 
in current references to rights it is generally ignored. The assump- 
tion is that the rights are the exact equivalent of an ordinary divi- 
dend, and it is known that when an issue of new stock is in prospect 
the tendency of market quotations is to rise, and when the rights 
come off the effect is exactly the same as when the stock sells ex- 
dividend ; the stock is soon selling at much the same figure as before 
the rights were issued. If this theory were sound it is evident that 
roads might issue these valuable privileges every month or so, and 
stockholders make a thousand per cent, per year on their money. 
This is the reductio ad absurdum. Railway shareholders like the 
rest of mankind cannot have their cake and eat it too. 

Issue of "Rights" a Form of Stock Watering. 

Let us take the specific case of St. Paul. On its present capital- 
ization, St. Paul is earning from 10 to 15% according as one esti- 
mates the amount spent for maintenance and the need of additional 
replacements. It earns very comfortably its seven per cent, div- 
idend on both classes of stock and in fact the stock sells on a 
rather higher basis, than the dividend would justify, doubtless in 
anticipation of an eventual increase in the dividend rate. 

The average price for the rights to the first 1906 issue of stock 
was $17. In anticipation of these rights the price of both classes of 
stock was run up very considerably, and when the rights came off 
the price was about the same as before they had been issued. The 
effect of this to the man who at this time sold his rights and his 
stock or who took up the new stock and then sold his entire holdings 
was to give him a cash dividend of $17 per share. It is obvious, 
however, that this cannot be the permanent effect, for this is to sup- 
pose that the -road can continue to earn from 10 to 15% on the in- 



INTRODUCTION 45 

creased capitalization as easily as upon the old. This might be true 
in a specific instance but it is obvious that it cannot be true generally. 
Otherwise there would be such a rush to build railways, with the 
consequent struggle for business and the reduction of rates that the 
earning power of St. Paul and of all other roads in its territory 
would fall to the general level of the earning power of money. If, 
for example, railroad men could freely borrow at from four to five 
per cent, and build railways that would yield them from ten to 
fifteen per cent., they would borrow every dollar they could lay 
hands on. As a matter of fact the general earning power of rail- 
way capital stands at about the same level as any other business 
involving a corresponding risk. No one could take 236 million 
dollars and build another St. Paul Railroad in St. Paul's territory 
and earn ten or fifteen per cent, dividends on the portion of capital 
set aside as stock. 

The present selling price of St. Paul stock represents the ad- 
vantage of a natural monopoly which every railway possesses in a 
greater or less degree, and the accumulative effect of thirty years of 
shrewd and careful management. The value of the rights was not 
based on the idea that the $25,000,000 of new stock would imme- 
diately earn a similar rate; they represented the value of the privi- 
lege of buying into a share of the St. Paul's present assets. It fol- 
lows therefore, that theoretically at least the value of the share- 
holders' stock was lessened by exactly the amount received in 
rights. Why then should the price of the stock rise exactly as 
though ordinary dividends were in prospect? The reason undoubt- 
edly is this : the St. Paul has a high reputation for good manage- 
ment ; the new issue did not represent more than about ten per cent, 
increase in the total capitalization of the road; and the expectation 
undoubtedly was that this money could be so well invested that the 
issue would not immediately impair the dividend paying power of 
the road greatly, and eventually not at all. 

In actual practice this theory works out very well. For example, 
the rights on Great Northern stock issues have been very consider- 
able and yet the stock steadily increased in price. This tends to 
obscure the fact that every such stock issue dilutes the value of the 
rest. It simply represents "taking profits." The increment in value 
would have been just that much greater had the stock privilege not 
been created. 

What then will the shrewd investor do? He will scrutinize very 
carefully the amount of the new issue, consider what percentage of 



46 INTRODUCTION 

increase it represents on the stock capital and in the total capital of 
the road, the purpose to which it is to be devoted, the record of the 
road with previous ventures of the same sort. If capital is in- 
creased more rapidly than the earnings he will take advantage of a 
time when the general level of stocks is high and sell out. If, on 
the other hand, he concludes that the new issue will be advantageous 
and profitable, he will take advantage of a general depreciation in 
the value of stocks to buy at the time of such general depression. 
He may be sure that the stock of roads issuing new securities will 
then be much more depressed than that of others. If, therefore, his 
judgment be sound, he will be able to profit by the fears of other 
shareholders who have not the same confidence in their own minds. 

How ito Compute the Value of Rights. 

Inasmuch as the method of computing the value of rights is 
slightly complicated, an illustration may be given. Let us take the 
instance of St. Paul again, where the stockholders were allowed to 
subscribe to 23% of their holdings to new stock at par. The com- 
mon stock was at that time selling a little below $200 per share. Let 
us take the round figure, and the operation is as follows : 

One hundred shares at $200 per share equals $20,000 

Twenty-three shares at $100 equals 2,300 

Total cost of 123 shares $22,300 



Average cost, $181 per share. 

Deducting $181 from the market quotation leaves $19, the value 
of the rights on each share of St. Paul stock. As a matter of fact 
the selling price was a little below $200, and the highest price of the 
rights fell a little below $19 per share. 

In other words the process is simply to take the number of new 
shares per hundred shares of the original holding to be subscribed 
for, and add the value of these new shares at the subscription price 
to the cost of one hundred shares at the market price ; then divide 
the total cost of both old and new shares by the total number of 
shares, and deduct the average price from the market quotation. 
This gives the selling value of the rights. 

"Convertibles." 

Of recent years there has been a tendency towards the issue of 
a new form of security, that is the convertible bond — a bond that 
at the option of the holder may be turned into stock at a fixed price. 



INTRODUCTION 47 

The Pennsylvania, the Atchison, the Erie, and the Delaware and 
Hudson have been among the roads to put out these new issues, but 
it is doubtful if any of the above have yielded the spectacular profits 
which were made from the convertibles issued by the Union Pacific. 
These bonds, issued at par, convertible into common stock of the 
Union Pacific at par, seemed a drug on the market for a consider- 
able time. They could have been purchased as late as 1904 as low 
as $90. With the coming of another year, after Union Pacific 
Common had begun to soar above par, the bonds, of course, went 
with them. When the stock sold above $190 the convertible priv- 
ilege represented a profit of nearly 100% on the investment. 

An attractive feature of the convertible bond is that it presents 
a minimum of risk with a considerable speculative opportunity of 
gain. The option remains with the holder to keep his bond or turn 
it into stock according as he considers to his best interest. The 
interest payments come before any preferred dividends or for that 
matter, if they exist, before interest payments on income bonds. 

They are, of course, junior securities, in case of the fore- 
closure of the company, to first mortgage or such prior liens ; but if 
the road be in good shape, financially, and if the fixed charges, in- 
cluding the interest on the issue of convertible bonds, consumes no 
more than fifty to sixty per cent, of the total net income — the road 
being in supposed good condition, well maintained and well managed, 
the security is as good as the average investor would find elsewhere. 
With a reasonable sense of security comes possibilities of a steady 
increment in the value of the stock of the road, into which the con- 
vertible bonds may be turned at the wish of its holder. Naturally 
the conversion price is fixed somewhat above the market price of 
the stock. The idea is that two or three years of opportunity should 
be allowed for the road to utilize the funds secured from the sale 
of the securities, in improvements and new constructions. When 
these improvements begin to show in increased earnings, the stock 
should rise to the conversion price, and the holder may then step in 
and take advantage of the rise. 

The investor has the advantages in the meantime of a fixed 
rate of interest which is not possible for the ordinary shareholder, 
and none of the hardships which may be entailed upon ordinary 
stockholders. 

Obviously it is a very attractive way of raising money, but not 
in all cases an advantageous one. It is scarcely so sound a policy as 
financing improvements or new constructions purely from stock 



48 INTRODUCTION 

issues, but on the other hand it is better than the issue of ordinary 
bonds which bear interest at fixed rates. If all goes well the con- 
vertibles are turned into stock eventually and the proper proportions 
of stock to total capitalization is maintained. 

Effect of "Convertibles" on Stock Prices. 

The first effect, of course, is to increase the Fixed Charges, and 
it is obvious that a road cannot as safely issue convertibles as it can 
issue stock. Moreover, the issues of convertibles lie as a dead 
weight on the stock itself and to that extent are detrimental to the 
interests of the existing stockholders. 

If, for example, the Atchison issues $50,000,000 of bonds con- 
vertible into common stock, and the conversion price be par, then 
when Atchison begins to climb above par, and the conversion takes 
place, the stock will be loaded with the extra requirements of divi- 
dend disbursements. Other things being equal, the situation of the 
prior stockholders will not be nearly so good as if the road had 
issued ordinary 4% bonds. In the latter instance, the prior stock- 
holders would have a smaller dividend surplus to divide between 
themselves, but if there is an increase of surplus they would by rea- 
son of the conversion receive only two-thirds of the benefit derived 
from the issue of new securities. In other words, the issue of con- 
vertibles would commonly tend to depress the price of the stock 
more than the issue of ordinary junior lien bonds, though the force 
of this is to some extent counteracted by the eventual conversion of 
the latter, and the lower Fixed Charges than would be the case with 
ordinary bonds. 

Figuring the value of the convertibles is comparatively simple. 
They are usually simply a junior security, a general lien on all 
sources of income. All the investor has to consider, therefore, is the 
general status of the road. That is determined by noting the percent- 
age of Fixed Charges on total net income, and the margin of safety, 
what is the average income of the road and what are the new securi- 
ties. This done, one may consult the market quotations and see how 
far they are from the conversion price of the bonds. 

Taking the specific case of Pennsylvania convertibles : The 
3^% issue of 1912 represents only a 25% increase of the fixed 
debt of the road, and scarcely a ten per cent, increase in its fixed 
charges, including all rentals, and guarantees for which the 
Pennsylvania was liable. As ordinary 3^2% securities, that is with no 
special liens, these bonds would have been worth, with savings bank 



INTRODUCTION 49 

money at 3^%, par or very near it. Savings bank money tending 
to rise to 4%, the price of the securities would naturally fall. The 
conversion price was $70 for the $50 share of the Pennsylvania 
stock, or on the basis of the New York quotations $140 for each 
$100 of stock. If these bonds could be bought at ninety, the point 
of profitable conversion would then be $126. If the market price 
of Pennsylvania went above this, there would be a profit in the 
conversion. As a matter of fact the chances are that these margins 
of profit will be very small and if there be any considerable discrep- 
ancy, the investor will do well to inquire very closely into the cause. 
Supposing a purchase of the bonds at $90, the rise of Pennsylvania 
stock above $126 would represent a clear gain to the holder of con- 
vertibles, plus his regular interest, which would be in the case noted 
slightly better than Zy 2 %. 

The Future of Prices; The Cycle Theory. 

At a first glance nothing would seem more fantastic than 
the idea of looking ahead ten or twenty years in the endeavor to 
forecast the general range of stock prices through this period. 
Yet it is certain that an intelligently speculative mind twenty or 
thirty years ago might have put forth a fair working guess at 
the course of prices within this intervening period, and barring 
the too frequent recurrence of wars, earthquakes and other 
visitations of divine Providence, there seems no reason why in 
a broad way the trend of prices in the future may not to some 
extent be anticipated. 

The general theory of the business cycle is now so well estab- 
lished that the business man or investor who would disregard it 
would be in much the same position as the farmer who would 
ignore the course of the seasons and plant his corn in the fall with 
the expectation of gathering it in December. That business 
tends to move in rather broad and irregular cycles, that a series 
of years of tremendous activity, of rising prices, inflated values 
and universal prosperity, — the flush times of a general "boom", 
are invariably and inevitably followed by a period of declining 
prices, business stagnation, wide-spread failure and general de- 
pression, is now a matter of elementary knowledge. That rail- 
way shares tend generally to follow this general cycle is not 
so well known and the proof of it is of some interest. 

Since 1872 Dun's Review has published tables showing the 
average price of 60 of the most active stocks on the New York 
market, and the present writer has charts showing these averages 

4 



50 INTRODUCTION 

back to the close of the Civil War. In these tables it is shown 
that in the 35 years from 1865 to 1900, the highest average point 
reached by stocks was in 1881 and that this high level was not 
again attained until 1901, just an even 20 years later. 

From 1870 to 1873 there was a general fall in stock prices, 
culminating in the famous panic, and this was followed by four 
years of general depression. Actually, stocks touched a much 
lower level in 1877 than in 1873. There was a precisely similar 
fall from 1890 to 1893, followed by the same four years of general 
depression, stocks reaching a record low level for ten years 
towards the close of 1896. 

From 1877 to 1881 and '82 prices rose rapidly, — in Dun's 
list by a total of 400%. This was followed by a sharp decline 
from '81 to '84, though prices never again reached the low level of 
'77 . From 1897 to 1901-2 there was an exactly similar rise in 
prices, in this instance, however, amounting to only 200%. From 
the top level of 1902 there was again a similar decline through 
1903-4, though prices did not return to the low levels of 1893-'97. 

From the low level of 1884 to 1887 prices rose very nearly 
100% and from that year showed a slow, oscillating decline to 
1897. The top level of 1887 was not again reached for 12 years 
thereafter. 

There was an exactly similar rise from the beginning of 1904 
through 1906 and almost to 1907, followed by a sharp fall. 

The 20-year parallel is so extraordinarily close that one 
might mistakenly suppose that one had here an almost panta- 
graphic means of forecasting prices. This is an illusion. The 
cycle is there, but it is an irregular cycle, like the perturbations 
in the orbit of a planet acted on by the attraction of various 
other planets. Thus, for example, the 60 stocks of Dun's list 
showed an average drop of 50% from the low level of 1873 to 
that of '77, a tremendous fall, though it is to be noted that the 
average fall shown in the table of ten of the best stocks, in the 
present writer's tables, shows no such heavy decline. On the 
other hand the low level of '96-7 was only slightly below the 
low level of '93, so that a trader who would have sold stocks 
"short" during the low level of '93, on the expectation of a further 
fall, as in '77 , or the investor who would have waited for such a 
fall, to invest, would both have missed their market. Conditions 
of '93 were better than conditions of '73, and the downward 
course of prices practically halted at the '93 level. 



INTRODUCTION 51 

Again, the rise from '77 to '81 was just twice as great as 
from '97 to 1902, so that any one who would have looked to 
see the average of 1901-2 rise to four times the average of '97, 
would have miscalculated sadly. Action and reaction are more 
or less equal, and just as the fall of '90-97 was less violent than 
the fall of '70-77, so the rise of '97-1902 was nothing like so 
tremendous as the rise to 1881. 

And yet further : the average of stocks never reached the 
level of 1881 again for an even 20 years, as already noted, but 
the top level of 1906 on Dun's list was 4% higher than in 1902, and 
on the Wall Street Journal's list of 20 active stocks the rise was 
slightly greater (from an average of $129 to an average of $138 
per share). The level reached in 1887, the highest point from 
1883 to 1899, was 28% below the high level of 1881. 

The fall from the top level of 1881 to the low level of 1884 
was 62%. The fall from the top level of 1902 to the low level 
of 1903-4 was, on Dun's list, only 29% and on the Wall Street 
Journal's list only 31%. 

The rise from the low level of '84 to the high level of '87 
was near 90%, while the rise from the low level of 1903 to the 
high level of 1906 was only about 48% — one-half as great. Here 
again action and reaction approximated equality. 

It is clear, therefore, that the cycle theory is available only 
within very wide limits and when its indications are checked 
and rectified by constant and careful examination of conditions. 

The Outlook (1907). 

With these very extensive reservations, the adventurous 
minded may make some sort of hazard as to the general trend of 
prices for the next ten or fifteen years. At the present writing 
(May, 1907), it does not seem probable that a general crisis, 
followed by a long depression, is yet due. There is much to 
indicate that it is not very far off. The strain upon banks is 
heavy, the expansion of banking capital from 1896 has been so 
great as to be unhealthy, the inflation of credits has been enor- 
mous, there has been wild speculation in real-estate, still wilder 
speculation in mining shares, there has been a rise of nearly 50% 
in the cost of living and the general commodity list. Prices of 
real estate all over the country have reached almost prohibitive 
figures, and a heavy fall in these prices is reasonably certain. A 
current despatch reports the passing of a thousand emigrants 



52 INTRODUCTION 

a day through Winnepeg and in one day the Rock Island road 
took out of Kansas City 9,000 passengers on land-seekers excur- 
sions. A Kansas banker reports that at present land prices a 
farmer cannot make over 5% on the valuation of his farm. 
Another despatch reports 10,000,000 acres of land in the Canadian 
Northwest held by speculators. These are all familiar earmarks 
of the land boom of the '80s, which ended so disastrously for the 
country. 

The price of copper has been almost double the average 
price of but a few years ago. The price of cotton is approxi- 
mately double the low levels of a few years ago. The earnings 
of the United States Steel Corporation and other enterprises 
have been something fabulous. 

This huge wave of prosperity is not confined to the United 
States nor North America. It is world-wide. It has been 
equally felt in Germany, and in Egypt, in Italy and the Argen- 
tine, in South Africa and Japan. It would be a miracle if it 
were not followed by a considerable recession. 

Again, the past few years have shown a steadily rising flood 
of immigration, amounting through 1906-7 to an average of over 
3,000 immigrants a day, through the single port of New York. 
It is to be noted that such a heavy rise of in-coming population 
has generally preceded a period of depression. Then, too, should 
the summer and fall of 1908 be a period of falling markets, it 
is altogether probable that a change of administration would 
take place. It has been shown by the writer that in the last 
forty years a period of depression and declining values has 
invariably resulted in such change, with one single exception. 

If a business decline should come, it is obvious that the 
bubble of inflation will be punctured. Prices will fall generally, 
simply because in the contraction of credits which must ensue 
the world will have less paper capital and paper profits with 
which to buy. With the prevalent scarcity of money, railway 
and other enterprises will postpone heavy improvements, the 
demand for labor will be slackened, many will be out of work 
and this will impose a certain tax on the community for the 
support of the unemployed. 

How far this curtailment of business will proceed, it is 
obviously impossible to forsee. But this much may be said : While 
business conditions all over the world are generally unsound, it 



INTRODUCTION 53 

seems certain that they are nothing like the conditions of '90-'93. 
The strain upon the banks is heavy but it is nothing like the 
strain that preceded the crisis of '93. It seems reasonable to infer, 
therefore, that if a sharp and severe depression should now ensue, 
it will be short-lived, and the recovery rapid, just as in the crisis 
of 1857. 

On the other hand, if the general liquidation of commitments 
should not be extensive, if the business recession should be 
mild, it is easy to see that the element of instability would 
remain and that we should skim along in good hope to a more 
drastic and prolonged depression, such as followed '93. The 
majority of mankind are optimists. It was clearly a sheer and 
ungovernable optimism which, in the face of banking conditions 
and the over extension of credits shown from '90 to '92, produced 
in '92 the expectation of a return of good times. 

It is the idea of the writer that the latter may be more 
or less the course of affairs within the next six or eight years. 

Taking a long look ahead, it does not seem improbable 
that the high level of 1906 will not again be reached for many 
years — possibly not before 1920. There are many forces making 
for this result. Merely to note one, it is obvious that with the 
general rise in commodity prices, materials and labor, the 
cost of operation of railways has been rising steadily, while on 
the other hand it is difficult to raise railway rates. This, of 
course has been done, and rates on eastern railways, especially 
on the coal roads, in 1907 were generally 25% or more higher 
than in the year of demoralization, 1899. In some cases — as in 
the Baltimore & Ohio — they were 50% higher. But increased 
freight rates are not accepted cheerfully by the public, and in- 
creased passenger rates very uncheerfully. The winter of 1906-7 
saw a perfect wave of hostile legislation sweeping through the 
various state legislatures over the country. All of this legis- 
lation looked towards lower rates rather than higher, in the 
face of the fact that farmers, laboring men, manufacturers and 
business men, generally, were getting from 50% to 100% more 
for their commodities than ten years previously. 

High cost of operation means decreased earnings and a much 
smaller surplus for interest and dividends. Were a prolonged 
period of business depression to come, this would mean a de- 
crease in gross earnings as well as in net, with still further im- 



54 INTRODUCTION 

pairment of surplus. All this need not be viewed with any 
serious alarm, for it would be simply suicidal to cripple by legis- 
lation, or otherwise, the greatest single industry in the country — 
the transportation business, and even the years of depression 
bring no such heavy declines in railway earnings as is generally 
supposed. The decline in gross earnings from the top level of 
'93 (fiscal year closing June 30th) to the bottom year ('94) was 
only about 12% all over the country. Freight earnings fell 
13.5%, but net earnings fell only 11.4%, the succeeding years 
showing a steady rise both in gross and net. It was much 
heavier than this in the unsettled West, but it was correspond- 
ingly less among the railroads of the East. 

So, while it may be the part of over-optimism to look for 
a generally higher level of prices than 1906 for some years to 
come, it is doubtful if any depression would produce so heavy 
a fall as in 1893, just as the fall of '93 was less than the decline of 
73. On the same line of reasoning, we may suppose that even 
in a period of general depression the average of railway prices 
would scarcely return to the low level of 1903, just as after the 
high prices of 1887 they did not quite return to the low level of 
1884. 

Both the rise and the fall in the period of 1881-1901 was 
less violent than in the preceding 20 years, and so we may sup- 
pose that the fluctuations in the period from 1902 to 1922 will 
be rather less violent than in the 20 years past. In other words 
fluctuations will lie within narrower limits. This will tend to 
decrease the opportunity of profit between buying and selling, 
but on the other hand the solidity of the investment will be 
enhanced and the risk of loss will be lessened. It is quite cer- 
tain that in 1907 the railways in America were in an immensely 
more stable condition than at any time from 1880 to 1890. Their 
earnings as compared with their capitalization are higher — that is, 
the amount of capital required to carry on the transportation 
business of the country is proportionately lower, even on a much 
lower level of rates than 20 years ago ; and the net earnings to 
the shareholders are much better. It is quite certain that in a 
broad way each cycle shows a distinct gain in the stability and 
profit of railway investments. 

If this line of reasoning be correct, and if the experience of 
the two broad cycles in the forty years since the close of the 



INTRODUCTION 55 

Civil War be on a sound basis upon which to estimate the course 
of the cycle to come, it does not seem impossible that the low 
level reached by prices in 1907 might be somewhere near the 
lower limit of this new cycle. 

Prices and Investment Yield. 

At least this is to be said : if the dividends paid by 20 of the 
solidest dividend paying stocks in 1907 be averaged, and this 
average dividend be divided by the average of the low price 
individually reached by each of these stocks in March of 1907, it 
will be found that the average yield to the investor at these prices 
was 6.2%, exceptionally high-priced stocks, such as the Dela- 
ware, Lackawanna & Western, paying 20%, being excluded 
from the list, as being of too great individual influence on the 
average. 

This average yield of 6.2% was about at the highest which a 
selected 20 solid stocks have shown in more than 20 years. The 
yield of 20 of the best stocks on the list at the lowest individual 
prices reached in 1893 was practically the same figure — 6.3%. 

The yield of a similar list of solid stocks at the average of 
the individual low prices of 1896 was 5.5%, and a similar list at 
the average low price of 1903 showed a yield of 5.2%. 

Estimation of values upon a basis of dividends is not, it is 
true, a very safe or reliable test. Still, taken through a series 
of years it is quite certain that the average dividends of 20 or 
more roads will approximate very closely the actual relative 
earning power of those roads ; and it seems certain that dividends 
in 1907 on the solider and better managed roads were as stable 
as the dividends of a similar class of roads in '93. It is true that 
following the spectacular increase of the Union Pacific's dividend 
in August, 1906, there was a sort of wave of dividend increases ; 
yet this could scarcely have been general if conditions had not 
seemed to justify such dividends in the minds of a fairly con- 
servative body of men. Probably no dividend increase excited 
more unfavorable comment, aside from the case of the Union 
Pacific, than did that of the Pennsylvania; and yet it is certain 
that the Pennsylvania in 1906 was better earning its 7% dividend 
than it was earning its 6% dividend in 1905 and preceding years. 

The meaning of all this is that in March, 1907, the best 
railway stocks on the list were selling on the same basis of yield 



56 INTRODUCTION 

as of 1893, and the yield of 1893 was in turn the highest of any 
year in the period from 1886 to the close of 1906. 

In a broad way it is obvious that the price of the best stocks 
as compared with their dividends will tend to approximate the 
prevailing rate of time money; that is to say, the average yield 
from an investment in stocks, taken year in and year out, will 
tend to preserve a fairly close relationship to the rate obtainable 
on good loans. Now, it is quite certain that there was nothing 
like the scarcity of money or bank strain in 1907 that there was 
in '93. Interest rates were not so high. In '93 confidence, which 
undoubtedly plays some slight, though absurdly exaggerated 
part in the fixation of prices, was rudely shaken by the failure of 
one great railway company after another. In 1907 there was 
nothing of this. 

The obvious conclusion in the mind of the writer is this: 
A prolonged wave of prosperity, resulting in such a prolonged 
bull market as that from the beginning of 1904 to the close of 
1906, three years lacking one month, is generally followed by 
a violent fall in prices. At such a time dividends are generally 
high and at the low level of prices reached in the subsequent 
decline the yield to the investor is apt to be as high, if not 
higher, than at the time of a severe depression, when money is 
scarce and prices seem tumbling to a bottomless pit. 

It may well be that the general dividend level of 1907 cannot 
be maintained, and obviously if it should decline, the absolute 
level of stock prices might decline more or less in sympathy. 
Nevertheless it is to be observed that if an extensive liquidation 
of committments and borrowings were to ensue, the effect of this 
would be to relieve the bank strain and the prevailing scarcity of 
liquid capital. Always supposing that a counteracting force, like 
the depreciation of the currency, from the enormous increase in 
the stock of gold, be not actively at work, this would mean lower 
interest rates and a consequent lowered expectation of invest- 
ment reurn. 

A decline in the general dividend rate might therefore not 
necessarily imply a corresponding decline in prices and we should 
have the condition foreshadowed above, that is, that the low 
levels of 1907 might represent somewhere near the low level of 
a period of years. 

It may well be that should a season of adversity come, stock 
prices would decline still further, but any considerable decline 



INTRODUCTION 57 

could only be the result of such a continuance of high rates for 
money as has not been known in 40 years. Such a condition might 
result from a continued or increasingly large output of gold and 
it is evident that the gold production is a matter meriting the 
closest attention of the careful investor. 

All that has been said in the preceding, concerning the gen- 
eral level of stock prices applies, it scarce need be said, only to 
averages, and should not be followed too implicitly in the judg- 
ment of individual properties. Even though the general level 
should remain below that of 1906 for some years, individual 
properties may rise far above the level of 1906. On the other 
hand, it is obvious that if after such a season of prosperity as 
from 1898 to 1906, a road could not in the climactic year of 1906 
show fixed charges below 70% or 75%, it was pretty certainly 
headed for a receivership in any very serious depression. The 
stocks of such roads will present no attraction to the careful 
investor at any price, no matter whether the general level be 
high or low. 

Prices and the Increased Supply of Gold. 

Such in broad outline seems the general outlook of 1907. 
There is at the present time but one powerful factor working 
seriously to change the prospect — that is the possible depreci- 
ation of the currency through the increase in the gold stock. 

Within the 10 years from '96 to 1906 the annual production of 
gold has more than doubled. It is estimated that within this 
period the world's money stock of gold has increased nearly 
50%. To many this fact is of profound significance and to this 
they ascribe the quite extraordinary rise in prices of commodities 
and the like, which has come within the same period. So there 
are not wanting serious and sane-minded prophets who look 
forward to 20c cotton, to still higher general rates of interest — 
10% even. 

Among this same class there is general expectation of a 
still further rise in the annual gold production, from $400,000,000 
to perhaps $600,000,000. Even the most careful statistician of 
the subject, Hon. Geo. E. Roberts, Director of the United States 
Mint, looks forward to an average production of four hundred 
millions per year through the next ten years. That this enor- 
mous production, if continued, would mean a serious depreciation 



58 INTRODUCTION 

of the money standard and a consequent rise in prices, is without 
question. 

In the mind of the writer, however, these prospects seem 
doubtful. The Germans have a sententious phrase that "No tree 
ever grows quite to heaven." When the balance of merchandise 
trade in favor of the United States rose from a debit in 1896 to a 
credit of $664,000,000 in 1901 there were not lacking serious 
observers to regard the situation with alarm. The United States 
threatened to bankrupt the world. But even in the face of a still 
further rise in commodity prices, which of course swells the 
nominal figures of the tables, the balance has fallen considerably 
since, and it will probably not reach the level of 1901 again in 
many years. 

So, too, it may prove with the gold industry. That gold 
mining should share in the world-wide expansion of business, 
seems elementary. There are few industries on a more speculative 
foundation. It would be extraordinary if, with the general out- 
break of speculation all over the earth, gold mining had not 
taken on an equal activity. When this world-wide "boom" has 
run its course, when the speculative fever has met with a sharp, 
and perhaps serious check, it seems inevitable that the gold in- 
dustry should show a similar reversal. 

If it does not, it is fairly certain that, with perhaps a tempo- 
rary reversal of form, prices will rise still further, stock values 
will be enhanced,, providing that rates can be correspondingly 
increased, while bonds will fall still more, and the preva- 
lent high rates of money of 1906-7 will look low in comparison. 
There is no more interesting question now engaging the atten- 
tion of investigators, and the point is one which every intelligent 
investor will consider with care. 

The Present Solidity of the Railroads. 

But a point still more vital to consider is that first of all, 
anticipation (and still more, apprehension) tends always to out- 
run the reality, and secondly, that no wave of prosperity ever 
lifts prices quite as high as holders for a rise had hoped, and no 
wave of depression ever affects the value of solid securities as 
seriously as the familiar connotations of "panic," "crisis" and "de- 
pression" would suggest. 

For the matter here in hand — that of railway investments — 
it is to Ue noted that no solid and honestly managed railroad 



INTRODUCTION 59 

was ever forced into the hands of a receiver by any panic what- 
soever. 

Practically without exception a great failure has always 
meant a great scandal. It has meant dishonesty and little else. 
From 1892 to the close of 1896, about 56,000 miles of main track 
out of a total of about 180,000 passed into the hands of receivers. 
But this included huge systems like the Richmond Terminal 
(now the Southern Railway), the Wabash, the Erie, the Union 
Pacific, the Baltimore & Ohio, the Reading, the Atchison and 
the Northern Pacific, each and every one of which was a history 
of disgraceful stock watering or stock jobbing, and a shame to 
American railroading. Four of these failures, as the above cita- 
tion shows, were due directly or indirectly to the evil influence 
and criminal practices of one man. Even roads like the Atchison 
were found actually to have stuffed their gross earnings; the 
B. & O. had charged actual operating expenses to construction 
and capital accounts. So heavily had the Pacific roads been 
loaded with debt that in the fairly prosperous year of 1892 the 
Union Pacific Railway showed fixed charges of 81% and the 
Union Pacific System of 91%, while in the year preceding the 
system had failed to earn its fixed charges. Fixed charges 
on the Northern Pacific in 1892 were 94%. With the generally 
unstable condition of the banks, loans exceeding deposits by 25% 
and more through the three years of 1890-1893, it would scarcely 
have been difficult for any intelligent observer to perceive that 
these roads could not escape a receivership and that their securi- 
ties, their stocks, at least, were next to worthless. 

But the great body of American roads, covering 70% and 
more of the total mileage of the country, stood firm, just as the 
better part of American roads stood firm in the depression of 
1873-77. A still higher proportion will stand firm through any 
depression to come. Fixed charges on the Union Pacific system 
in 1906 were 33%, on the Northern Pacific 29%, on the B. & O. 
39%, the Reading 45%, the Atchison 42%. These roads, it is 
certain, will never again see the sheriff at their doors. . 

Not all the reorganizations were as successful, and some 
equally disgraceful stock watering and stock juggling have 
brought old and safe and finely managed properties into a highly 
unsound condition. It is to the credit of present day railway 
finance that these obvious swindles have brought the securities 
of these properties into thorough disrepute. 



60 INTRODUCTION 

But it is safe to say that upwards of 75% of American 
railway systems are sound and stable, and this is undoubtedly a 
percentage which no other business in the country, not excepting 
the banking business, could show. It is not without meaning 
that roads like the New Haven, the New York Central, the 
Pennsylvania, the Illinois Central, the Chicago & Northwestern, 
the St. Paul and other well-conducted railroads have weathered 
the storms of '73 and '93 with no serious loss to their share- 
holders. Dividends have been passed for a time, but they have 
been speedily resumed and the shareholder who has not been 
frightened out has had his reward. 

Factor of Safety. 

There remains but one point to which, in view of the con- 
ditions roughly sketched above, the writer would call especial 
attention. That is, that the investor should look well, always, 
to the factor of safety. Before he puts his money into any road, 
no matter if it be on the recommendation of the greatest banker 
in the United States, let him consider how far that company is 
prepared to weather a storm. Few roads ever prospered under 
receivership, no matter how honest or how able. The receiver- 
ship itself is a handicap. No matter how high the yield, no in- 
vestor whose primary regard should be the safety of his money 
will put it into a road whose fixed charges, after ample charges 
for maintenance, consume much more than 50% of the total 
net income available for interest, dividends and improvements — 
that is, save in exceptional cases like the New York Central — and 
until he has satisfied himself thoroughly that the property is 
sound. 

For the convenience of those not well acquainted, the fol- 
lowing list of the principal roads is given, with the percentage of 
total net income consumed by fixed charges in the highly pros- 
perous fiscal year of 1906. 

Table of Fixed Charges. 

Atchison, Topeka & Santa Fe 42% Chic. & Eastern Illinois 68% 

Atlantic Coast Line 57% Chicago & Northwestern 39% 

Baltimore & Ohio 39% Chicago, Burlington & Quincy 45% 

Boston & Maine 78% Chicago Great Western 67% 

Canadian Pacific 33% Chicago, Milwaukee & St. Paul 32% 

Central of Georgia 47% Chic, St. P., Minn. & Omaha 42% 

Central R. R. of N. J. 50% C, C, C. & St. Louis 69% 

Chesapeake & Ohio 53% Colo. & Southern 55% 

Chicago & Alton 75% Delaware & Hudson 40% 



INTRODUCTION 



61 



Del., Lackawanna & Western 38% 

Denver & Rio Grande 52% 

Detroit, Toledo & Ironton 87% 
Duluth, So. Shore & Atlantic 115% 

Erie 66% 

Grand Rapids & Indiana 76% 

Grand Trunk 65% 

Great Northern 26% 

Hocking Valley 31% 

Illinois Central 47% 

Iowa Central 79% 

Kansas City Southern 54% 

Lake Erie & Western 69% 

Lehigh Valley 46% 
Long Island 101% 

Lake Shore & Mich. So. 38% 

Louisville & Nashville 54% 

Maine Central 46% 

Michigan Central 57% 

Minn. & St. Louis 77% 
Minn., St. P. & Sault Ste. Marie 44% 

M., K. & T. 75% 

Missouri Pacific 60% 

N. Y. C. & Hud. River 64% 



N. Y., Chic. & St. L. 

N. Y., N. H. & Hartford 

N. Y., Ont. & Western 

Norfolk & Western 

Northern Central 

Northern Pacific 

Pennsylvania 

Pitts. & Lake Erie 

Pitts., Cin., Chic. & St. L. 

Reading 

Rock Island 

Rutland 

St. L. & San Fran. 

St. L. & Southwestern 

Seaboard Air Line 

Sou. Pacific 

Southern 

Texas & Pacific 

Tol., St. L. & Southwestern 

Union Pacific 

Vandalia 

Wabash 

Wheeling & Lake Erie 

Wisconsin Central 



41% 

48% 
53% 
37% 
28% 
29% 
38% 
11% 
54% 
45% 
83% 
69% 
82% 
76% 
78% 



69% 
40% 
61% 
31% 
54% 
80% 
90% 
69% 



Importance of Fixed Charges to the Investor. 



The high degree of stability imparted to interest payments 
and dividends by a low percentage of fixed charges and the high 
degree of instability imparted by a large percentage, is so ele- 
mentary that it would seem to need no emphasis. And yet this 
item is habitually disregarded by perhaps 90% of bond buyers 
and stock buyers. On this account it may be worth while to 
illustrate by simple comparison the effect, for example, of a 20% 
decline in gross or net earnings. We will compare the con- 
ditions of two roads whose Fixed Charges are respectively 75% 
and 25% of the total net income. The operation would be as 

Suppose a 20% Decline. 
Earnings ...$1,000,000 $800,000 

Exp. (70%). 700,000 560,000 



follows : 
Say 



Net $300,000 $240,000 

If F. C. 75% = 225,000 225,000 

Surplus for div $75,000 $15,000 (Case I) 

Decrease 80% 

If F. C. 25% = 75,000 75,000 

Surplus $225,000 $165,000 

Decrease 26% (Case II) 



62 INTRODUCTION 

It will be seen from the above that a 20% decline in the net 
earnings would, in the first instance, mean a decrease of 80% in 
the surplus, while in the second case the same decline would 
mean a decrease of only 26% in the surplus — figures which suf- 
ficiently indicate what a high percentage of fixed charges means. 

In this connection it may be further noted that in the large 
holding companies, like the Pennsylvania, the New York Central, 
the Union Pacific, and others, the factor of safety and the surplus 
shown tends to be relatively more stable than in companies 
largely or exclusively dependent upon the earnings of their own 
roads. This is due to the general custom of American railways 
of paying out in dividends only a part of the actual surplus 
earned. From this it results that dividends are much more stable 
than earnings and that the income of the holding companies from 
this source will correspondingly show smaller fluctuations than 
earnings. When, therefore, as in the case of some of the large 
holding companies named, the income from investments repre- 
sents a considerable portion of the total net income shown, the 
surplus, other things being equal, will be much more stable than 
in other companies. 

It is needless to add that this stability is still further height- 
ened when, as in the case of the Pennsylvania, Union Pacific 
and some other roads, the percentage of fixed charges is at the 
same time low. 

Over Capitalization. 

Perhaps it may not be out of place likewise to suggest that 
investors have little need to be frightened at the prevalent hue 
and cry of over-capitalization. There are among the railway com- 
panies many instances of unquestionable over-capitalization, but 
taken as a whole, it is certain that the capitalization of American 
railways is low. 

The statistics of the Interstate Commerce Commission show 
that at the close of the fiscal year of 1905 there was outstanding 
a total of: 

Stocks $6,554,557,051 

Bonds and Other Obligations. . . 7,250,701,070 



Total $13,805,258,121 

On the basis of an estimate of 218,101 miles of main track, 
this is equal to a par capitalization of $65,926 per mile. 



INTRODUCTION 63 

The report further shows that the railway companies owned, 
of their own and other corporations, stocks to a par value of 
$2,070,050,108 and bonds to the amount of $568,100,021, or a total 
of $2,638,152,129. This means that there was outstanding in the 
hands of the public a little over $11,000,000,000 of securities. 
This would mean an actual net capitalization of about $54,000 
per mile. 

But this is the net capitalization simply of the mileage of 
main track, and does not take into account all the second, third 
and fourth track, yard trackage, sidings, &c, of which there was 
in 1905 nearly 100,000 miles additional, or a total of 306,796 miles. 
If the net capitalization of $11,200,000,000 be divided by this total 
mileage, the average net capitalization would be reduced to about 
$36,000 per mile. 

Now it is quite certain that in 1907 there were not many 
places in the United States where a good railroad could be laid 
down and equipped for operation for less than $20,000 per mile. 
It is highly improbable that the railways of the United States 
could, as a whole, be reproduced for an average of $30,000 per 
mile, bare cost, without any regard to terminal facilities, right of 
way, coal, land, timber, steamship, and countless other holdings. 

For the proposed extension of the St. Paul road from the 
Missouri River to Puget Sound, it was optimistically estimated 
that the road could be built for $50,000 per mile — a single track 
line. This was doubted by many engineers, and the St. Paul is 
one of the best-managed, and its gross capitalization per mile 
among the lowest of any railway in the United States. It is quite 
certain that there are many sections of the Pacific roads, of the 
Pennsylvania lines, &c, which could scarcely be reproduced at 
much less than $75,000 per mile. 

It is quite certain that the terminal facilities of the railways 
in the great centers, like New York, Philadelphia, Pittsburg, 
Chicago, San Francisco, Seattle, New Orleans, Galveston and 
the like; the right of way for lines through rich and long settled 
states like Massachusetts, New York and Pennsylvania; the 
enormous coal holdings of the "anthracite coalers," like the Read- 
ing, the Lackawanna, &c. ; the holdings of the "soft coalers" ; the 
huge land holdings of the Northern Pacific and other lines ; the 
ore lands of the Great Northern ; the steamships of the Great 
Northern, the Southern Pacific, the New Haven, &c, taken to- 
gether represent a property valuation rising easily into the bil- 



64 INTRODUCTION 

lions of dollars. The Pennsylvania Railroad is spending a hun- 
dred millions simply to put its tracks under Manhattan Island. 
The New York Central is spending fifty or sixty millions on its 
already enormously valuable New York terminals. 

Practically No Watered Capital. 

It is safe to say that the railroads of the United States, less 
the market value of their holdings, could scarcely be reproduced 
today for their actual net capitalization. It is not probable that 
there is any other extensive business interest in the United States, 
or for that matter in the world, for which such a claim as this can 
be made. There are few successful small industries and not many 
large ones in the country which are not valued at, and earning 
profits on a valuation, anywhere from five to fifty times their 
actual physical cost. The average price of the stocks and bonds 
listed on the New York Stock Exchange, even at the high prices 
of 1906, was rather below par. 

It seems to be forgotten likewise that a considerable part 
of the stock capital of the railways still represents little more 
than possibilities, that even in the flush year of 1905 on only 
two-thirds of this stock capital were any dividends being paid at 
all, and that in 1895 less than 30% paid dividends. The average 
rate on all the railway stocks of the United States in 1905 was 
only about 3% and in 1895 only 1.5%. In no other industry are 
the average earnings on nominal capital so low. The average 
country merchant or small shop keeper who made less than from 
15% to 30% on his invested capital would picture himself as 
approaching bankruptcy. 

The cry of over-capitalization can have its origin only in an 
utter ignorance of industrial and economic facts. What the 
average clumsy novice at corporation tinkering apparently can 
never understand is that, as a rule, over-capitalization is to no 
one so harmful as to the company itself. This fact has recently 
been exemplified by the Southern Railway, and many other prop- 
erties. 

The demands for dividends on watered capital are rarely, if 
ever, a factor in rate making. For example, the percentage of 
its gross earnings paid to invested capital by the Chicago & 
Alton in 1906 was actually only 27%, as compared with 40% in 
1898, the last year of the Blackstone management, when the 
Chicago & Alton was considered a low capitalized property ; and 



INTRODUCTION 65 

freight rates in 1906 were 22% lower. The Chicago & Great 
Western is one of the three or four most absurdly over-capitalized 
railways in the United States, and there is not a line in the 
United States whose average rates are so low, or show so small 
a percentage of net profit from actual operations, quite disregard- 
ing the return on the capital invested. 

The present writer would be the last to defend such deals as 
that of the Chicago & Alton, the Rock Island and their like, but 
it is to be noted that the wrong is to the investor — the ignorant 
and credulous investor — and not to the shipping or travelling 
public, not to the people as a whole. There is nothing to show 
that low capitalization means low rates; and it is highly improb- 
able that any well-managed property will suffer from hostile or 
confiscatory legislation. 

The securities of over-capitalized and watered companies 
tend to seek their natural and intrinsic value, and the investor 
in railway securities has far more to fear from ill-judged advice, 
from "tips" and rumors, from enthusiasm or fright, — in a word, 
from mistakes in his own judgment or from failure intelligently 
to anticipate the course of business conditions. 

He has little to fear from hysteria. Waves of anti-railroad 
agitation come and go with the flux and reflux of the business tide ; 
but the roads remain. 

It is not without interest that many of our roads have now been 
in existence, some of them continuously paying dividends, for more 
than half a century. They have come to stay. They will be here 
at the end of another half century. No legislation will destroy 
them, no dishonest management will materially cripple them, and 
they are in the end the soHdest, safest and most profitable field of 
investment to be found anywhere in the world. Taken as a whole, 
they are managed with pre-eminent skill and ability. Taken as a 
whole, they are honestly managed. To the shrewd and careful in- 
vestor buying when their shares are obviously low and other folk are 
frightened out, selling them out again when they are obviously 
too high, and when the foolish folk who sold at the bottom can 
see only the most roseate future, they present a greater oppor- 
tunity of profit, with a smaller element of risk, than any other 
form of property in which he may place his surplus funds. 

5 



Note On " Concealed Earnings." 

In the spring of 1907 it became increasingly evident that the 
general rise in wages, cost of materials and supplies was telling 
heavily on the operating expenses of the railroads and tending 
greatly to reduce their net earnings, in spite of a general increase 
in the gross business done. The general rise in commodity prices 
is computed by the government statisticians at from 40 to 50% 
since 1896. The tables compiled by Dun's Review and Bradstreet's 
confirm this conclusion. Railway officials make about the same 
estimates for their own operating expenses. 

The full force of this has been especially felt through the 
year of 1906-7; and nowhere more so than in the costs of main- 
tenance. An examination of six leading railways of the United 
States, including the New York Central, the Pennsylvania, the 
Illinois Central, the Louisville & Nashville, the Atchison and the 
Southern Pacific, shows that maintenance charges, reduced to 
their element units, engine and car mile, have increased on the 
average 50% since 1900 and in some instances have doubled. 

This is in part due to the introduction of heavier equipment, 
and it seems to be forgotten that while larger cars and engines have 
made it possible to keep down the "cost of conducting transpor- 
tation," they have necessitated much heavier charges for roadway 
and repairs. The rest is due largely to increased costs. It is evident 
that all this represents no gain whatever to the stockholders or to 
the road. 

The practice, therefore, of finding large concealed earnings 
through a comparison of maintenance charges in 1906-7 and 
the scale of some six or seven years previous, is wholly 
misleading and investors will exercise a healthy distrust of any 
such showings. It was the concurrent opinion of two operating 
officials, as expressed to the writer, that there were, save in rare 
instances, no concealed earnings in the maintenance accounts of 
1906-7 generally. 



ALABAMA GREAT SOUTHERN RAILROAD. 

The Alabama Great Southern is a part of what is known as 
the Queen & Crescent route, composed of the Cincinnati, New 
Orleans & Texas Pacific and several subsidiary companies, oper- 
ating between Cincinnati and New Orleans. The Queen & Cres- 
cent route is to all intents a part of the Southern Railroad system 
and a large majority interest of the Alabama Great Southern is 
owned by the Southern Railway. The officers and directors of 
the line are largely the same as those of the Southern. 

In 1906, the company had outstanding the following securi- 
ties: 

Common stock $ 7,830,000 

Preferred stock 3,380,350 



Total stock $11,210,350 

Funded Debt 1st mtge. 6% bonds 1,750,000 

Gen. Mtge. 5% Sterling 3,207,600 

Certificate of funded arrears of dividend 

on pfd. stock 399,464 

Equipment Trust Obligations 2,427,000 

Total capital and funded liabilities $18,984,414 

Total capital, per mile $61,438 

The company directly operates 309 miles of track and its 
gross earnings in 1906 amounted to $3,774,620, or $12,215 per 
mile. 

A very striking characteristic of the income account was 
the fact that the operating ratio was 81%, both for 1905 and 1906. 
Upon examination it will be found that this high operating ratio 
was in large part due to enormous overcharge for maintenance, 
the items for several years comparing as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


645,726 
713,696 
792,919 
947,443 
1,019,806 
1,179,828 


$ 945 
1,220 
1,450 
1,638 
1,697 
1,980 


$1,358 
1,413 
3,539 
1,945 
2,241 
2,819 


$2,293 
2,633 
2,989 
3,583 
3,938 
4,799 


Aver, for 6 yrs 


883,236 


$1,488 


$1,885 


$3,372 



(67) 



68 ALABAMA GREAT SOUTHERN RAIEROAD 

On a road of this traffic density it is probable that from 
$2,500 to $3,000 would have represented an ample maintenance 
charge, so that the surcharge for 1906 was probably in excess of 
$2,000 per mile. This on 309 miles of road operated was equiva- 
lent to a total of $618,000. 

The nominal total net income shown was $766,062 but if the 
amount of surcharge indicated above be added to this, the actual 
income was probably in excess of $1,350,000. Interest, rentals 
and other deductions from the income amounted for the year to 
$367,597, which would represent less than one-third of the esti- 
mated actual net income, leaving a very large margin of safety 
for these securities. 

Deducting interest, rentals, &c, from the estimated net income 
would have left an actual surplus of around $1,000,000. The 6% 
dividend on the preferred called for only $202,821, so that the 
actual earnings on the $7,830,000 of common stock was in the 
neighborhood of 10%. 

Six per cent, is being paid on the preferred stock, no dividend 
upon the common. The arrears of dividend on the preferred have 
been funded, so that there are no longer any back payments to 
be made and there seems no reason now why the common stock 
should not be receiving a dividend. 

The preferred stock may be regarded as a solid 6% security 
with no danger of its dividend payments being impaired. As to 
the question of dividends on the common, that is a matter which 
will probably be determined by the exigencies of the Southern 
Railway. But it matters very little to the holder of the stock 
whether the surplus of earnings is put back into the improve- 
ment of the road or accumulated as cash surplus, or paid out as 
dividends. It seems fairly obvious that a 5 or 6% dividend could 
be paid on the basis of the earnings for 1906 and should the road 
continue to show the excellent results of 1906, and the years 
immediately preceding, it seems altogether likely that such a 
dividend would be declared upon this stock. 

As of June 30th, 1906, the Southern Railway owned $4,540,- 
050 par value of this common stock, so that it would have a very 
generous interest in a dividend, if it were to be declared. Bought 
and held towards such an eventuality, at below 40 or 50, it would 
seem as if this were an excellent purchase. 



ATCHISON, TOPEKA AND SANTE FE 

RAILWAY. 

The "Atchison," as it is familiarly known, is one of the great 
railroads of the country, the only one* owning its own line from 
Chicago to the Pacific, reaching over a vast territory, and now after 
many troublous years, becoming, under a fine and conservative man- 
agement, a magnificent property. It has been extending steadily 
within the last ten years, and year by year, as the country through 
which it runs develops, its traffic grows more and more varied, and 
the road itself thus becomes less and less dependent upon any single 
industry, or on any single section. The Atchison was at one time 
the largest single railroad in the world, and though under fore- 
closure it was shorn of a considerable part of its mileage, it still 
ranks among the ten greatest. 

History. 

The Atchison was organized, or at least projected, back in the 
war days by a daring Kansas promoter ; but it was some time before 
funds were secured with which construction of the road could be 
begun. The earliest part of the road, from Topeka to Emporia, in 
central Kansas, was not opened until 1870, and the extension be- 
tween Topeka and Atchison in 1872. The company had been en- 
dowed with a splendid land grant in case the road was completed 
as projected, by 1873. In the ten months that followed the opening 
of the line to Atchison, the company carried the road westward 340 
miles, and the land grant was saved. It was a feat which even in 
America, where railroads were wont to be built with lightning 
rapidity, has scarcely any parallel. 

In the depression that followed the road suffered, but it plucked 
up courage again, and in the early eighties, more than three thous- 
and miles of new road were constructed ; it gained control of some 
3,500 miles of other road, so that by 1887 it was operating over 
6,000 miles. The extension to the Pacific was then begun, and com- 
pleted in 1888; and by 1890, through the lease of the St. Louis & 
San Francisco and the Colorado Midland, it was operating over 
9,000 miles, more than any other railroad company in the world. 

(69) 



70 ATCHISON, TOPEKA & SANTA FE RAILWAY 

The road as it stood then was largely the creation of President 
Strong, whose ability and daring color one of the most colorful 
chapters in American railway construction. The road was extended 
too rapidly, however, for safety, and in 1889 it was forced to a re- 
organization, and the Strong management eliminated. But even the 
reorganization failed to put it on a solid financial basis, and in the 
depression which followed 1893, the road went into bankruptcy, 
and was reorganized into the present company. The St. L. & S. F. 
and the Colorado Midland were cut out of the system, and one of the 
ablest and most conservative managers of the country, Edward Pay- 
son Ripley, placed at its head. Since that time the record of the 
road has been one of unbroken and splendid growth, with gradual 
extension as the needs of its territory demand. 

At the close of the fiscal year of 1906, the road was operating 
8,444 miles and controlling through ownership of stocks and bonds 
auxiliary lines aggregating 1,093 miles, with 393 miles under con- 
struction. Of the auxiliary lines, 740 miles were included in the 
operating reports of the system, instead of separately, beginning 
July 1st, 1906, making a total of 9,184 miles. 

Of this total, nearly 300 miles is double-track, and very shortly 
the entire line from Chicago into central Kansas will be double-track 
road. The lines of the system extend from Chicago through Kansas 
to Denver, and southward through Albuquerque to Los Angeles and 
San Francisco, with various branches which carry the road to El 
Paso and Pecos City in Texas, and southward from Kansas to 
Galveston and Matagorda, with branches into the Beaumont oil 
fields. The completion of a short bit of track will give the road a 
second line from Kansas City to Albuquerque, with much lower 
grades, and further extensions under way will complete the Gal- 
veston-Albuquerque line, which eventually will be extended to New 
Orleans. The Atchison will then parallel the Southern Pacific 
throughout the Southern's entire length. It has the nucleus of 
further extensions in a small road running southward from Eureka 
in northern California. 

Ownership. ' 

The Atchison has the distinction of having a larger number of 
stockholders than any other railway in the United States save the 
Pennsylvania. In 1905 it reported to the Interstate Commission 
17,523 stockholders. It is one of the great independent roads and 
long remained free from the domination of any special interests. In 



ATCHISON, TOPEKA & SANTA FE RAILWAY 71 

1904, however, the Union Pacific interests, it was reported, acquired 
$25,000,000 of the stock in order to insure harmonious relations be- 
tween the two properties. But this stock was not, up to the printing 
of the 1906 report, openly held by the Union Pacific, though it is 
very well known that the Atchison and Union Pacific work together 
in very friendly rivalry. 

In a discussion of the question of railway control in the United 
States in the "Wall Street Journal" in 1906, it was accounted that 
the dominant figures in the Atchison are H. H. Rogers of Standard 
Oil, E. J. Berwind, a great coal operator, H. C. Frick of Pitts- 
burg, and J. P. Morgan. All of these were in the directorate of 
the road save Mr. Morgan, who is represented by Charles Steele. 
The other directors were : Edward P. Ripley, president ; Victor 
Moraw r etz, chairman of the board, and long the general counsel 
of the road ; ; Thomas B. Fowler, persident of the New York, On- 
tario and Western ; George G. Haven, a New York capitalist ; H. 
Rieman Duval, a director of the Seaboard Air Line, the American 
Beet Sugar Company and other enterprises, New York; Byron L. 
Smith, of Chicago, a director in the Chicago and Northwestern ; 
Benjamin P. Cheney of Boston ; ; Charles S. Gleed and Howell 
Jones of Topeka ; Andrew C. Jobes of Wichita, Kan. ; and John G. 
McCullough of Vermont, also director in the Erie Railroad. The 
board is divided into four divisions, each set holding for four 
years, so that the control of the road would not immediately 
pass even though any single interest were to obtain stock control. 

The make-up of the executive committee, always a most sig- 
nificant fact as indicating the location of control, included Victor 
Morawetz, chairman, also a director in the Norfolk and Western; 
Edward P. Ripley, president of the road ; H. H. Rogers, likewise a 
member of the executive committee of the St. Paul and director in 
the Union Pacific road; Charles Steele, a director in the Erie, the 
Reading, the Northern Pacific and other Morgan interests ; George 
G. Haven, a director in the Morton Trust Company and the Na- 
tional Bank of Commerce of New York, the Mutual Life Insurance 
Company and many other enterprises ; Thomas P. Fowler of the 
N. Y. and Ontario, and Edward J. Berwind, also a director in the 
Morton Trust Company and in the National Bank of Commerce, 
and very closely associated, though not a director, in the affairs of 
the Pennsylvania R.R. 

It will be seen from this analysis that many interests are repre- 
sented and no single one, apparently, is predominant., 



72 ATCHISON, TOPEKA & SANTA FE RAILWAY 

Capitalization. 

With stocks and bonds amounting to and selling on the open 
market for nearly half a billion dollars, the Atchison represents one 
of the largest single companies in the country. Its capital account 
on June 30th, 1906, stood as follows : 

Common stock $102,000,000 

Preferred stock 114,199,530 

Total stock $216,199,530 

Funded Debt (net, including auxili- 
ary lines) 280,378,300 

Total capital $496,577,830 

Approx. capitalization per mile $58,887 

Average miles operated 8,434 

Net earnings on total capitalization. . . . 5.9% 

Stock on total capitalization 43% 

Fixed charges on total net income 42% 

Factor of safety 58% 

In the makeup of the capitalization table both the rentals paid 
and the securities owned are so small, compared with other items, 
that they may be neglected, the one about balancing the other. 

In the above table the bonds of the auxiliary companies not held 
in the Atchison's treasury are included, to the amount of $5,732,500, 
and also the bonds of some leased lines, on which interest is paid as 
rental, to the amount of $1,708,000. On the other hand the Atchi- 
son's own bonds, to the amount of $2,528,436 held in its treasury, 
have not been included. 

On the basis of the average mileage operated, the Atchison's 
capitalization per mile, it will be seen, is high for a western but not 
for a Pacific road, though the figures shown would be reduced by 
nearly ten per cent, if the 740 miles of auxiliary lines of the road 
included in the mileage of the system since 1906 had been taken into 
consideration. As it stands, the Atchison, with $58,887 per mile, 
compares with $30,257 for the Chicago and Northwestern, $33,900 
for the St. Paul, $28,600 for the Canadian Pacific, $73,992 for the 
Union Pacific, and $64,426 for the Southern Pacific. 

That this capitalization is high is further shown by the per- 
centage which the net earnings represent on this total capitalization. 
The Atchison's figure of 5.9% compares with 10.5% for the North- 



ATCHISON, TOPEKA & SANTA FE RAILWAY 73 



western, 9.7% for the St. Paul, 9.4% for the Canadian Pacific, 8.0% 
for the Union Pacific, and 6.6% for the Southern Pacific. 

The amount of stock nearly balances the amount of bonds, the 
stock in the above table amounting to 43% of the total capitalization. 
Included in the Funded Debt is over $41,000,000 of bonds con- 
vertible into common stock at par ($50,000,000 authorized) and as 
the Atchison common rises above par, this conversion will probably 
take place, with the effect of reducing the funded debt and increas- 
ing the proportion of stock. 

That the drastic reorganization of the road which took place 
with the foreclosure of 1895 was effectively done is evidenced in the 
fact that in 1906 fixed charges consumed only 42% of the Total 
Net Income. This leaves a Factor of Safety for the underlying 
securities of 58%. 

The full 5% dividends on the preferred consumed about 20% 
of the total net income of 1906, so that there was still left a com- 
fortable margin of safety for these securities. 

Equities Owned. 

The Atchison has, pledged as security for the funded debt, 
$32,296,000 in bonds of subsidiary companies in which the chief 
item was $21,000,000 of Gulf, Colorado and Santa Fe bonds, 
and in addition to this, stocks of a par value of $14,379,697, its un- 
pledged securities amounted in 1906 to $2,837,000, but the larger 
part of this latter item is the two and half million dollars of the com- 
pany's own general mortgage bonds already referred to. 

The valuation of the securities pledged is not given, hut if they 
were taken at their face value they would reduce the estimated capi- 
talization of the company by about 10%. 

Increase of Capitalization. 

Since the reorganization of the company in 1895, the amount 
of common and preferred stock has remained unchanged. In the 
six years from 1900 the funded debt was increased mainly 
through the issue of $41,000,000 of convertible 4% bonds (two 
issues) sold to provide funds for additional construction and the 
general betterment of the system and $30,000,000 of serial deben- 
tures. In the same period the gross earnings increased nearly 
70%. The comparison follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1899-0 
1905-6 


$102,000,000 
102,000,000 


$114,199,530 
114,199,530 


$191,236,500 
275,484,800 


$407,436,030 
491,684,330 


$46,232,078 
78,044,347 



74 ATCHISON, TOPEKA & SANTA FE RAILWAY 

Increase over six years : Total capital, 21% ; gross earnings, 
68%. At the beginning of 1907, the issue of $100,000,000 new con- 
vertible bonds, with a corresponding amount of stock, to be held 
against this, was authorized, and in 1907, $26,000,000 of these 
bonds, bearing 5% interest, were issued. 

Character of Traffic. 

In former times the Atchison was mainly dependent for its 
revenue upon the grain fields, but the impression that this is still 
true is erroneous. A very interesting change has come over the 
Atchison traffic within ten years, the various items of this change 
comparing, in per cent, of tonnage, as follows : 



Products. 

Agricultural 

Animal 

Mines 

Forests 

Manufactures, etc. . 



1896. 


1906. 


% 


% 


30 


24 


13 


8 


27 


31 


9 


13 


21 


24 


100% 


100% 



It will be seen that relatively farm products and cattle shipments 
have very considerably declined, while minerals, lumber, manufac- 
tures, etc., have shown a considerable increase. 

This is the healthiest sort of growth and it may be expected 
with the steady development of the Atchison's territory, and es- 
pecially the development of its rich mineral fields, this change will 
be progressive, making for increased stability of earnings. 

Stability of Earnings. 

It will be seen from the following table that in the ten full 
years of operation as a reorganized company the Atchison's gross 
earnings have risen more than 160%, while the earnings per mile 
have very nearly doubled. In these ten years the earnings per mile 
have shown but a single instance of decrease from one year to an- 
other, and that too slight to be of interest. The increase for 1906 
over the preceding year was especially notable, amounting to over 
12%. But this was, it should be recollected, a year of extraordinary 
prosperity for all the railroads of the country. 



ATCHISON, TOPEKA & SANTA FE RAILWAY 75 



Year 


Miles Operated 


Gross Earnings 


Per Mile 




1896-7 


6,479 


$30,621,230 


$4,752 




1897-8 


6,936 


39,214,099 


5,653 




1898-9 


7,033 


40,513,498 


5,760 




1899-0 


7,341 


46,232,078 


6,297 




1900-1 


7,807 


54,474,823 


6,977 




1901-2 


7,855 


59,135,086 


7,528 




1902-3 


7,965 


62,350,397 


7,828 




1903-4 


8,180 


68,171,200 


8,333 




1904-5 


8,305 


68,375,837 


8,233 




1905-6 


8,433 


78,044,347 


9,253 



This handsome increase in earnings did not result from any 
advance in freight rates, as has been the case with the Pennsylvania 
and other eastern roads, but was in the face of a distinct though no 
very considerable decline. The average rates per ton mile received 
by the Atchison have been : 

Year. Cents. 

1892 1.25 

1896 1.12 

1900 97 

1906 93 

As the Atchison's territory steadily develops in railroads, these 
rates may be expected to decline still further, but it is obvious that 
they are not now very high, for the west, and that the natural gain 
in business ought more than counterbalance any possible reduc- 
tions in rates that would be required. 

Maintenance. 

From the following table it will be seen that the total appropri- 
ations per mile for maintenance have increased in six years 70%, 
while the traffic density in the same period has increased only 
about 40%. 





Traffic Density 


Maintenance per mile 


Total 


Year 


Way 


Equipment 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


496,579 

538,733 
590,777 
572,404 
569,668 
693,873 

577,005 


$ 824 
781 
1,168 
1,121 
1,370 
1,479 

$1,123 


$ 801 
1,001 
1,068 
1,223 
1,314 
1,271 

$1,113 


$1,625 
1,782 
2,236 
2,344 
2,684 
2,750 


Average 


$2,236 



Extra main track, 309 miles. 



76 ATCHISON, TOPEKA & SANTA FE RAILWAY 





Traffic Density 


Maintenance per mile 


Total 




Way 


Equipment 


Nor. Pacific- 
Sou. Pacific. 
Union Pacific 
Rock Island. 
Burlington... 


729,102 
594,898 
739,206 
462,106 
580,024 


$1,300 
1,446 
1,173 
1,022 
1,104 


$ 791 

1,246 

1,049 

759 

1,032 


$2,091 
2,692 
2,222 
1,781 
2,136 



It will be seen from the above comparisons that the amounts 
expended by the Atchison per year compare very favorably with the 
Southern Pacific and the Union Pacific, the former of which es- 
pecially has been heavily charged for improvements in its operating 
expenses. 

That the Atchison's charges are high is evidenced in the items 
for maintenance of equipment. These amounted in 19®6 to $3,101 
per locomotive, $888 per passenger car, and $103 per freight car. 
These are very high figures, and can only mean that large additions 
were made to the rolling stock of the company under the guise of 
maintenance. 

From 1903 to 1905 Atchison suffered very severely from floods, 
and the increased maintenance charges through these and subse- 
quent years represent, in part, an endeavor to repair the damage that 
has been done, out of earnings. But over and above these the oper- 
ating expenses of the Atchison undoubtedly show considerable con- 
cealed earnings, which probably could be conservatively estimated at 
$500 per mile. Even if the 1906 average were reduced by this sum, 
it would still compare favorably, for example, with the St. Paul or 
the North Western. This on 8,400 miles of road would mean con- 
cealed earnings to the amount of over $4,000,000. That an item 
of something like these proportions was there speaks admirably 
for the management of the road. 

Improvements. 

But the Atchison's large maintenance charges represent only 
a part of the sums which have been expended on the road to bring 
it up to a high standard of efficiency. From the surplus earnings 
of six years the following sums have been deducted : 

1900-1 Improvements .$1,000,000 

1901-2 " 2,500,000 

1902-3 " 3,000,000 

1903-4 " 3,000,000 



ATCHISON, TOPEKA & SANTA FE RAILWAY 77 

1903-4 Fuel Reserve Fund 239,500 

1904-5 " " " 319,000 

1904-5 Expenses, Bond sales 1,083,000 

1905-6 Improvements 4,500,000 

Fuel Reserve Fund 218,000 

Total $15,859,500 

In addition to the above the following amounts were re- 
ceived as net proceeds of the sales of lands embraced in the 
Santa Fe Pacific Land Grant: 

1902-3 $579,700 

1903-4 570,400 

1905 681,300 

1906 366,800 

Total $2,198,200 

The latter amounts were directly written off the book value 
of railroad franchises, etc., and do not appear in the income ac- 
count. 

If these items be added to the amounts written off for im- 
provements this would represent a total of $18,057,700 surplus 
earnings turned back into the property in six years. 

These sums are not large when compared with the enormous 
amounts required annually to maintain a huge system like the 
Atchison, but taken into consideration with the heavy mainte- 
nance charges they show that the policy of the road has consist- 
ently been one of large betterments from earnings. 

Ten Years of Development. 

Tke report of the Atchison for 1906 makes an interesting 
review of the development of the Atchison since its reorgani- 
zation into the present company. Including in its operations the 
controlled companies, covering an aggregate of nearly eleven 
hundred miles of road, the following are the increases shown for 
the ten years ending June 30th, 1906: 

Average operated mileage 47% 

Gross earnings 165% 

Gross earnings per mile 79% 

Net earnings from operation (before charges) 296% 



78 ATCHISON, TOPEKA & SANTA FE RAILWAY 

For the year ending June 30th, 1897, there was no net in- 
come remaining after charges, while in 1906 the net income, in- 
cluding the undivided income of the auxiliary lines, after deduct- 
ing all charges, amounted to $18,270,000. This was equivalent to 
the full 5% on the preferred stock, and 12.3% on the common 
stock outstanding. 

During the same period the capital obligations of the com- 
pany were increased only 25%. 

In this same period the Atchison has paid out in dividends 
upwards of $60,000,000. This is a fine showing for a company 
which in 1897 could scarcely meet its running expenses and 
charges. 

Surplus Earnings. 

Disregarding the undivided surplus of the auxiliary lines, not 
a large item, the surplus over all charges, but before improve- 
ment appropriations, has been as follows: 



Year 


Surplus 


Dividends 

Paid on 

Preferred 5f 


Per cent. 

Earned on 

Common 


Dividends 

Paid on 

Common 


Average 

Price 

Calendar Year 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


$12,474,529 
15,564,527 
13,898,330 
15,359,771 
11,742,346 
17,733,209 


5 
5 
5 
5 
5 
5 


7.7 
9.8 
8.1 
9.6 
6.0 
11.8 


3% 

4 

4 

4 

4 

4 


34 
70 
83 

72 
72 
87 



The reduction in the surplus shown for 1903-4, and especially 
in 1904-5, was due to the heavy losses which the road sustained 
from floods. This is stated by President Ripley in his reports 
to have amounted in 1905 to a full 3% on the common stock. 
Heavy improvements and special constructions have been made 
to obviate these washouts, so that the recurrence of these losses, 
at least in any such magnitude, can hardly be expected. Even 
in the face of these losses it will be seen that the surplus shown 
on the common stock after payment of the full 5% dividend on 
the preferred, has averaged 9% in these six years. 

Dividend Record. 

Beginning with 1880, the Atchison began to distribute large 
dividends, and in 1881 a stock dividend of 50% was declared. 
Even in the face of this stock increase, dividends were maintained 



ATCHISON, TOPEKA & SANTA FE RAILWAY 79 

at 6% for the succeeding 6 years. But this free-handed policy 
brought the road to disaster in 1889, and thereafter no dividends 
were paid until the reorganized company began dividends on the 
preferred in 1899. In 1901 dividends were begun on the com- 
mon. The full record is as follows: 

Common. Preferred. 

% % 

1879 3 

1880 sy 2 

1881 6 and 50% stock 

1882-6 6 

1887 6y 4 

1888 5j/ 4 

1889-98 

1899 2y 4 

1900 4 

1901 zy 2 5 

1902-5 4 5 

1906 5 5 

At the annual meeting of 1906 the 4% dividend on the com- 
mon was increased to a 5% rate, through the declaration of a 
2y% dividend, and in 1907, the rate was still further increased 
to 6%. i 

The Balance Sheet. 

At the close of the fiscal year of 1906 the balance sheet showed 
as follows : 

Current assets, $23,141,559; current liabilities, $16,924,944; 
leaving a working balance of $6,216,615. 

This is a very favorable showing, especially as regards the 
item of cash, which amounted to $17,321,750. 

The balance to credit of Profit and Loss at the close of the 
year was $19,985,482, the larger part of which could be figured 
as cash. 

Investment Value. 

The preferred stock is limited to 5% non-cumulative divi- 
dends and the full 5% has been paid for six years. In the last five 
of these, the net surplus remaining over and above these pay- 
ments has been equivalent to about 8% additional. This means 



80 ATCHISON, TOPEKA & SANTA FE RAILWAY 

an average surplus for each year of about 2y 2 times the amount 
required for the preferred dividend. With the high character of 
the Atchison management, its heavy maintenance charges, and 
the writing off from earnings of considerable sums for improve- 
ments, Atchison preferred may now be looked upon as a solid 
5% stock, likely to earn its dividend, and pay its dividend even in 
years of stress. 

With money ruling at 4%, Atchison preferred is entitled to 
sell well above par. As a matter of fact its average price in five 
years has been rather below par. The stock sold as low as $58 
per share in 1900 and $70 in 1901. It sold up to $108 in the latter 
year, declining to $84 in the slump of 1903. It was quoted at 
$106 in 1906. Though the dividend is limited, control of the 
Atchison would be a coveted asset to any road and with the com- 
mon selling at the same figures or better, it may be expected that 
the preferred will sell in general very near to the average of such 
stocks. On any decline below par, it would certainly present an 
attractive purchase. 

When Atchison common was put upon a 4% basis in 1901, it 
had just passed through a crop failure, and its mileage in un- 
settled regions was greater than that of any other road in the 
country, its equipment was in poor shape, and the road in need 
of improvements. The disbursement of $10,000,000 per anum in 
dividends, as the preferred and common required, at such a time, 
was a doubtful policy, and undoubtedly the road would be in a 
great deal better shape now had at least a part of its disburse- 
ments been turned back into the road. 

The Atchison's policy has been exactly the reverse of that 
of the Southern Pacific, which, save on its preferred, paid no 
dividends whatever up to 1906, while its earnings have enor- 
mously increased. No one knows better than a railroad man 
how rapid is the deterioration of railway property and the Atchi- 
son was probably in little better position than the Southern Pa- 
cific when the Harriman management took hold of the latter. 

But whatever criticism might have been justifiable in 1901 
scarcely retains its force in face of the unprecedented prosperity 
of subsequent years. In 1901 the surplus shown by the Atchison 
for its common stock amounted to only $880 per mile; in 1906 
these earnings were $2,100 per mile. This, in the face of heavy 
increase in the maintenance charges, seems amply to justify the 
increase in the dividend from 4 to 6%, as was done in 1906-7. 



ATCHISON, TOPEKA & SANTA FE RAILWAY 81 

It is certain that a 6% dividend in 1906-7 had a far solider basis 
in the amount of surplus income than had a 4% dividend in 1901. 

Against this is to be set over the fact that the six years 
under view have been years of simply phenomenal prosperity. It 
is a repetition of the early eighties. In the early eighties Atchison 
was paying higher dividends than it has ever paid since, and it is 
interesting to recall for example, that in 1880 Atchison was sell- 
ing as high as $148 per share, and that as late as 1887 it sold at 
$118 per share ; and this was after a 50% stock dividend had been 
declared in 1881. From 1893 to 1895 this stock habitually sold 
at from $3 to $5 per share. When, after two full years of 
operations, the reorganized company had shown excellent results, 
the stock could still have been picked up, in 1898, for $10 per share. 
In 1901, the year that the stock was put upon a 4% basis, it was 
to be bought for $42 per share, and for as low as $54 in 1903. In 
1906 it sold at $110. 

Meanwhile in more ways than one the Atchison is winning 
its right to the title sometimes given it of "The Pennsylvania of 
the West." It is to be observed that the Pennsylvania policy is 
not one of parsimonious dividends, nor of shrinking from heavy 
capital expenses. It is one of liberal maintenance, aggressive ex- 
pansion, and the free issue of stocks and bonds. Such a policy is 
far safer in the Atchison territory today than in the Atchison 
territory of 1880 to 1890. 

It seems not improbable that should the extraordinary earn- 
ings of 1906 show no heavy set-back, Atchison will remain on a 
6% basis. If, with fine earnings and excellent prospects the stock 
on a 4% basis should average for the four years previous to 1906 
around $80 per share, it is evident that on a 6% basis it would 
tend to sell at par or better. The high price of 1906 was in an- 
ticipation of a 6% dividend and when only a 5% rate was declared, 
the stock fell abruptly. But if the stock, on a 4% basis 
could sell at $54 to $64 per share in the panicky conditions of 
1903-4, it might show a considerable recession from the 1906 
figures. In March of 1907, it sold at $83. 

In 1906, when the Baltimore and Ohio went to a 6% basis, it 
still failed to sell above $125 per share. And the Baltimore and 
Ohio stock had no load of convertible bonds to carry. It is evi- 
dent that as soon as Atchison common sells considerably above 
par, the $50,000,000 of 4% convertibles will be turned into this 
stock. While this would decrease the Fixed Charges by $2,000,- 

6 



82 ATCHISON, TOPEKA & SANTA FE RAILWAY 

000, the percentage of Total Net Income required for the Fixed 
Charges is already low, so that this would have very little effect. 
On the other hand, the conversion into stock on a 6% basis would 
add $3,000,000 more to the dividend requirements, which is a 
considerable sum even for the Atchison. 

The investor will probably conclude, therefore, that while 
Atchison 6% common at par represents a fairly solid purchase, 
the speculative outlook for a very great enhancement in the price 
is not so large as it might be if the convertibles were not in the 
way. But on any sharp declines below par the stock would un- 
doubtedly present solid investment attractions. 

The Convertibles. 

The security of the Atchison convertibles is sufficiently 
shown in the discussion on the capitalization of the road. With 
total Fixed Charges, including these bonds, of something less 
than half the Total Net Income, it is obvious that the earnings 
of the road would have to show a tremendous slump before in- 
terest payments on these bonds would be endangered. They have 
not the safety of first mortgage bonds, but on the other hand 
there are excellent prospects of conversion into stock of much 
greater value within the next ten years. 

It is obvious that the quotations on these bonds will more or 
less follow the fluctuations of the price of the common, and on 
any decline in sympathy with the latter, they would present an 
excellent investment of this class. 



ATLANTIC COAST LINE RAILROAD. 

The Atlantic Coast Line is, without doubt, the most extra- 
ordinary railroad organization in the United States, if not in the 
world. Directly this company operated in 1906 4,333 miles of 
rails, but it owned a controlling interest in the Louisville & Nash- 
ville, operating 4,205 miles of rails and directly controlling about 
1,400 miles more. Jointly the Atlantic Coast Line and the Louis- 
ville & Nashville lease the Georgia Railroad, operating nearly 
600 miles of track, and in addition the Louisville & Nashville has 
a half interest in the control of the Chicago, Indianapolis & 
Louisville (the Monon). Altogether, the Atlantic Coast Line 
controls, directly or by ownership of a half or greater interest, 
11,784 miles. 

The gross capitalization of this system is in excess of 400 
million dollars, and the control of all this enormous property is 
held by the Atlantic Coast Line Company of Connecticut, merely 
a holding company, with but $10,500,000 of stock outstanding. 
This holding company owns a majority of the capital stock of the 
Atlantic Coast Line Railroad. In 1898 its then outstanding 
capital stock of $5,000,000 was doubled by a 100% stock dividend, 
and 2 years later, that is, 1900, $10,000,000 of 4% "certificates of 
indebtedness," practically the equivalent of 4% bonds, were issued 
to the stockholders as a second 100% dividend. That is to say, 
the original holder of stock in the road would now have twice 
the amount of stock and an equal amount of 4% certificates, or 
the equivalent of four times his original investment. 

From this it will be seen that, supposing control to have 
been held by a single interest, this would have required originally 
an investment of a little over two and one-half million dollars ; 
and this sum would now be represented by double this amount 
of stock, which in 1906 sold as high as $167 per share (in 1905 
$170) and likewise by double the amount in 4% certificates, a 
solid security worth around par, with money ruling at 4%. That 
is, the holders of this controlling interest might in the interval 
have sold these certificates for twice their original investment, 

(83) 



84 ATLANTIC COAST LINE RAILROAD 

and thus without having a dollar of real capital invested, still 
retain control of a company which, in its turn, controls over 
11,000 miles of railway, with four hundred millions of capital- 
ization. To what extent the original five millions of stock of 
the holding company represented an actual outlay of capital, the 
present writer has not been able to ascertain ; but without going 
further back, it is doubtful if any such amount of capital has 
ever been developed to such far-reaching results in the recent 
history of American railroads. 

History. 

The Atlantic Coast Line Railroad grew out of the 
organization of the Atlantic Coast Line Company, which was 
organized in 1889, under the laws of Connecticut. Its purpose 
was the practical consolidation under one ownership of a series 
of Southern roads along the Atlantic coast and included the old 
Wilmington & Weldon, the Charleston & Western Carolina, the 
Wilmington, Columbia & Augusta, the Richmond, Freder- 
icksburg & Potomac and a number of smaller lines. In 1898 
several of these lines were amalgamated into the Atlantic Coast 
Line Railroad of Virginia and the Atlantic Coast Line Railroad 
of South Carolina. These two lines, with others, were finally 
consolidated into the Atlantic Coast Line Railroad in 1900. The 
Savannah, Florida & Western Railway, before known as the 
"Plant System," owning 2,235 miles of road, was merged in 1902, 
and this, with a number of smaller mergers brought up the mileage 
directly operated in 1906 to 4,333 miles. It also owns a one-sixth 
interest in the Atlanta (Georgia) Belt Line Company, and, as 
noted, leases, jointly with the Louisville & Nashville, the Georgia 
Railroad, operating 571 miles. The purchase of the Louisville 
& Nashville is discussed under "Equities Owned." 

The Coast Line System was largely the creation of the late 
Wm. T. Walters of Baltimore, and his son, Henry Walters, for- 
merly president and now chairman of the board. As illustrating 
the enhancement resulting from the merger, it was stated in the 
"Wall Street Journal" that an investor who owned in 1886 $10,000 
par value of the old Wilmington & Weldon stock, then having a 
market value of $17,500, and who held it until it was converted 
into Atlantic Coast Line Railroad stock, received through the 
various consolidations and stock distributions which followed, 



ATLANTIC COAST LINE RAILROAD 85 

securities of a market value of about $175,000. In other words, 
the increment in value during this period was 1,000%. 

The lines directly operated extend southward from Rich- 
mond and Norfolk to Tampa and Punta Gorda in Florida, with a 
connecting line of steamships owned by the company, the Penin- 
sular & Occidental, extending to Havana and Nassau. Its line^ 
extend westerly to Montgomery, Alabama, and. via the Georgia 
Railroad to Atlanta. Throughout its greater length the Atlantic 
Coast Line is directly paralleled by the Seaboard Air Line and the 
Southern Railway. 

As already noted, the majority of the stock of the Railroad 
company is owned by the Atlantic Coast Line Company of Con- 
necticut, which in turn is owned largely in Baltimore and the 
South. In 1906, the president of the Connecticut company was 
Michael Jenkins, of Baltimore, and Waldo Newcomer was vice- 
president ; other directors were : Henry Walters, Warren De- 
lano, Jr., Alexander Hamilton and N. J. James. The directors of 
the Railroad company included : Henry Walters, chairman of 
the board ; Alexander Hamilton, first vice-president ; Michael 
Jenkins, Waldo Newcomer, Morton F. Plant, representing the 
Plant estate; F. W. Scott, E. B. Borden, Donald McRae, H. B. 
Short, J. J. Lucas, J. H. Estill, Warren Delano, Jr. 

The property is very closely held, and in 1905 the railroad 
company reported only 883 stockholders. This is the smallest 
number for any large system in the United States, and compares 
with 9,572 for the Southern Railway and a similar number for 
the Illinois Central. 

The Atlantic Coast Line system stands very distinctly apart 
from other roads and beyond the affiliations brought to it by the 
purchase of the Louisville & Nashville control, it is not closely 
associated with any other systems or interests. 

Capitalization. 

In 1906 the Atlantic Coast Line Company of Connecticut 
had outstanding: 

Stock $10,500,000 

Certificates of Indebtedness . 13,000,000 

Total capital $23,500,000 

As of June 30th, 1906, the capital account of the Atlantic 
Coast Line Railroad was as follows ; 



86 ATLANTIC COAST LINE RAILROAD 

Common stock $42,980,000 

Preferred stock 1,596,600 

Class A 1,000,000 

Total stock $45,576,600 

Funded debt: 

Mortgage debt $77,708,850 

Certif. of Indebt 21,568,800 

L. & N. Coll. bonds 35,000,000 

Total capital $179,854,250 

Securities held 56,955,299 

Approx. net capitalization $122,898,951 

Approx. net capit. per mile $28,403 

Average miles operated 4,327 

Net earnings on net capital 7.1% 

Stock on net capitalization 37% 

Fixed charges on Total Net Income 57% 

Factor of Safety 43% 

It will be seen that the net capitalization of the Atlantic 
Coast system is low, more nearly approaching that of the suc- 
cessful roads of the middle west, whose average capitalization is 
around $30,000 per mile, but whose mileage earnings on the other 
hand are around half again as great. 

The estimate of $28,403 for the Atlantic Coast stands against 
a similar estimate of $47,453 for the Seaboard Air Line, $49,223 
for the Southern Railway, $39,684 for the Louisville & Nashville 
and $31,771 for the Central of Georgia. 

The fact of low capitalization is further evident in the per- 
centage which the net earnings show on this estimated net capi- 
tal. The figure of 7.1% for the Atlantic Coast compares with 
8.9% for the Louisville & Nashville, 4.2% for the Southern Rail- 
way and 3.7% for the Seaboard Air Line. It will be seen that the 
stock represents a comparatively small share of the gross capital- 
ization and about 37% of the estimated net capitalization. 

On the other hand, the Fixed Charges in 1906 consumed only 
about 57% of the Total Net Income, leaving a nominal Factor of 
Safety of 43%. The road has a very considerable equity in its 
majority interest in the Louisville & Nashville, so that in point 



ATLANTIC COAST LINE RAILROAD 87 

of fact, the Factor of Safety is rather higher than above indicated. 
It will appear further on that all of these estimates are on 
the basis of rather low maintenance charges; had the expendi- 
tures of the road been on the same liberal scale as generally pre- 
vails over the country, its surplus income would have been some- 
what reduced. 

Equities Owned. 

In 1902, the Atlantic Coast Line acquired $30,600,000 of the 
$60,000,000 outstanding capital stock of the Louisville & Nash- 
ville Railroad, a majority interest. This stock had been pur- 
chased in the open market in a speculative deal by John W. Gates 
and his associates. The latter turned it over to J. P. Morgan & 
Co., who in turn sold it to the Atlantic Coast Line, receiving in 
payment $10,000,000 cash, $35,000,000 in 4% 50-year collateral 
trust bonds, secured by the deposit of the stock, and $5,000,000 
par value of Atlantic Coast Line stock. This was equivalent to 
about $163 per share, rather higher than the highest market 
figure ever reached by this stock, either at the top of 1902 or 
1906, which was $159 per share. It was considerably higher than 
the highest point touched during the competitive buying of the 
stock by the Gates party. It was, however, undoubtedly an ex- 
cellent purchase. The Louisville & Nashville is out and out the 
best railroad property in the South. It has for some years been 
charging its maintenance very heavily for improvements and it 
has actually been earning rather in excess of 15% on its stock 
for some years. Though it has been paying only 6%, it might 
readily pay 7 or 8% and thus make fair return to the Atlantic Coast 
on the purchase price paid. 

It has frequently been assumed that the Louisville & Nash- 
ville may be taken over under lease by the Atlantic Coast Line, 
in which case all of the surplus earnings would go to the leasing 
road. It is probable, however, that the minority shareholders in 
the Louisville & Nashville would hardly be satisfied with less 
than 8% guaranteed, so that with the increase in operating ex- 
penses within the last year or two, the surplus might not be large. 
It is quite certain, however, that in any event the Atlantic Coast 
Line has in this property an asset of immense value and undoubt- 
edly worth much more than the purchase price paid. 

The Louisville & Nashville shares are carried at a book value 
of $45,554,220 (the additional $5,000,000 paid in stock being 



88 



ATLANTIC COAST LINE RAILROAD 



omitted). The balance of the sum included under securities 
owned is chiefly made up of the Atlantic Coast Line Company's 
own bonds, held in the treasury and therefore representing no 
equities. 

Increase of Capitalization. 

In the following table the increase of capitalization from the 
year of the consolidation is shown, but the $35,000,000 of Louis- 
ville & Nashville trust bonds, issued in purchase of that road have 
not been included. On this basis it will be seen that the increase 
in capitalization has been rapid, but the increase of earnings still 
more so. The items compare as follows: 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 

Earnings 


1900 

1906 


$15,890,200 
42,980,000 


$18,390,300 
2,596,600 


$24,426,500 
99,277,650 


$ 58,707,000 
144,854,250 


$ 7,586,746 
24,868,448 



Net increase over six years: Nominal capital, 146%; Gross 
earnings, 226%. 

In March of 1906 new stock to the amount of $4,557,600 was 
offered to the stockholders at par, to 10% of their holdings. The 
effect of this was to increase the capital stock of the company to 
very closely $50,000,000. 

Stability of Earnings. 

No very satisfactory tabulation of the earnings of the system 
can be made back of the year of the consolidation. Since then, 
mileage and earnings have compared as follows : 



Year 


Miles 
Operated 


Gross 
Earnings 


Per Mile 


1899-00 


1,759 
1,756 
1,756 
4,139 
4,192 
4,307 
4,327 


$7,586,746 
7,915,099 
8,549,526 
19,682,456 
20,544,975 
22,222,903 
24,868,448 


$4,318 
4,507 
4,868 
4,756 
4,901 
5,160 
5,747 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 .<.:-] 

1905-6 



It will be seen that the increase in the earnings has been due 
mainly to the extension of the system and that the mileage earn- 
ings, at least up to 1906, had increased rather slowly. There was 
a quite notable increase for the year of 1906, 



ATLANTIC COAST LINE RAILROAD 



89 



There is one characteristic of the Atlantic Coast Line's earn- 
ings that must be considered and that is the very high average 
rate which the company obtains. The average per ton mile for 
1906 was 1.13c, which is among the very highest in the country 
for any large system and almost twice the average rate for the 
country at large. It is not, however, strikingly higher than 
that received by the immediate competitors of the road, 
comparing with 1.12c for the Seaboard Air Line, .93c for the 
Southern, .80c for the Louisville & Nashville. These figures com- 
pare, for example, with the average freight rate on the Norfolk 
& Western of .47c and of .55c on the Illinois Central. As to what 
extent this high average is due to the character of traffic, the very 
unsatisfactory reports of the company give no clue. The average 
train load is low, amounting to 168 tons in 1906, as against 204 
for the Southern and 230 for the Louisville & Nashville. 



Maintenance. 

From the following table, it will be seen that the traffic den- 
sity of the road is very small, smaller even that that of the Sea- 
board and hardly a third that of the Louisville & Nashville. It 
would be expected that the maintenance charges would be much 
lower but hardly in quite the degree that they were. The items 
compare as follows : 





Traffic Density 


Maintenance per Mile 




Year 


Way 


Equipment 


Total 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


213,685 
247,549 
258,100 
256,463 
272,087 
310,734 

259,769 


$619 
727 
723 
665 
731 
792 

$709 


$608 
538 
520 
440 
517 
714 

$556 


$1,227 
1,265 
1,243 
1,105 
1,248 
1,506 


Average 


$1,265 


Louisv. & Nash. 

Southern 

Seaboard 


929,594 
435,987 
311,366 


$1,490 
860 
620 


$1,537 
964 
611 


$3,027 
1,824 
1,231 



It may be that an average of $700 per mile of way was 
adequate for a road of this traffic density, but it hardly seems as 
if an average of $556 per mile for maintenance of equipment was 
sufficient. The proof of it may be assumed from the fact that in 



90 



ATLANTIC COAST LINE RAILROAD 



1906 the road found itself handicapped for rolling stock, and at 
the beginning of 1907 was obliged to sell high interest bearing 
notes for the purchase of further equipment. It is safe to say- 
that the road might readily have spent from two to three hundred 
dollars more per mile without more than keeping up to the gen- 
eral level of successful roads over the country, and this differ- 
ence on four thousand miles of road would have meant a differ- 
ence of from a million to a million and a half per year in the 
amount of available surplus shown. It is on this account that the 
showing made in the table following is to be taken with some 
reserve. This conclusion is emphasized by the fact that the road 
has not followed the general custom of other roads and turned 
back considerable sums from improvements into earnings. In 
other words, not only were maintenance charges low, but the 
nominal maintenance charges represented all that was put into 
the road from this source. There were no special appropriations 
from the surplus to make up for the somewhat conservative 
policy of the road in this regard. 



Surplus Earnings. 

With the reservations noted above, the funds available for 
dividends have shown as follows : 







Dividends 


Per Cent. 


Dividends 




Year 


Surplus 


on Preferred 


Earned on 


on 


Average 






Stock 


Common 


Common 


Price 


1899-0 


$2,152,406 


21 








1900-1 


1,755,980 


5 


5.4 


2i 


... 


1901-2 


2,270,257 


5 


3.4 


3i 


. . . 


1902-3 


2,993,029 


5 


8.0 


5 


116 


1903-4 


4,283,482 


5 


11.6 


5 


130 


1904-5 


4,669,712 


5 


10.4 


5 


145 


1905-6 


4,816,942 


5 


10.7 


6 


149 



It will be seen that in the last three years under view, the 
road nominally earned rather more than 10% on its common 
stock. But it is safe to say that under a more liberal maintenance 
policy, these figures would have been reduced, perhaps by 20 or 
30%. 

It is not quite clear why, with such rates as it obtains, earn- 
ings should not have been greater. The operating ratio for 1906, 
65%, was not low and maintenance charges were not responsible. 
In other words, the line is apparently an expensive one to operate, 



ATLANTIC COAST LINE RAILROAD 91 

Dividend Record. 

The following shows the dividend payments of the different 
classes of stock from the year of the consolidation : 

Dividends 
Common 
Year. (and Class A certfs.) Preferred. 

1900 iy 2 

1901 iy 2 5 

1902 zy 2 5 

1903 5 5 

1904 5 5 

1905 5 5 

1906 6 5 

The amount of preferred stock has been steadily diminishing, 
so that almost the entire surplus is available for dividends on the 
common. It will be seen that after three years as a 5% stock, 
late in 1905 the common stock was put on a 6% basis. 

In the period under view, rights of very slight value accrued 
through the issue of $8,500,000 of stock in 1902, subscribers being 
offered this stock at $125 per share to the amount of 40% of their 
holdings; in 1906, $4,557,600 worth of stock was issued to the 
shareholders at par, the rights on the same showing a small 
premium. 

In addition to the above, in Jan., 1905, an extra dividend of 
25% was paid on the common stock of which 20% was in com- 
mon stock scrip of the railroad company, and 5% in certificates 
of indebtedness of the Atlantic Coast Line Company of Con- 
necticut. 

The Balance Sheet. 

At the close of the fiscal year of 1906, the balance sheet 
showed : 

Current Assets $8,556,203 

Current Liabilities 4,254,838 



Leaving a working balance of $4,301,365 

There were also deferred liabilities of $1,503,482, partially 
offset by deferred assets of $254,760. The amount of cash was 



92 ATLANTIC COAST LINE RAILROAD 

$5,118,029 and the amount to credit of profit and loss was $9,- 
297,363. 

Investment Value. 

In 1902 the preferred stockholders were given the option of 
exchanging their shares at the rate of $100 of preferred stock for 
$125 in 4% certificates of indebtedness. The preferred is en- 
titled to non-cumulative dividends of 5%. Under this arrange- 
ment the larger part of the preferred has been so exchanged, 
leaving in 1906 only $1,596, 600. The effect of this change was to 
considerably increase the fixed charges of the road but the pro- 
portion of total net income consumed by fixed charges is still 
reasonably low and the margin of safety sufficiently ample. The 
preferred may be regarded as a solid 5% stock, entitled to sell 
under normal conditions of money at around $125 per share. 

The common stock, now on a 6% basis, has shown very high 
figures. Even after the stock dividend of 20%, in January, which 
increased the common stock by one-fifth, it sold up to $170 per 
share in 1905 and to $168 in 1906. From this point it declined 
rather steadily under the general pressure, reaching $112 early in 
1907, and falling to $94 in the slump of March. This low price 
was accounted for partly by the general decline in securities, 
partly by the necessity which this road, among many others, 
found of selling three-year notes at a high rate of interest. It 
may have been due partly, also, to the feeling that the road had 
not been as liberal in its maintenance charges as it might have 
been and that the showing of surplus available for dividends was 
somewhat at the expense of skimped maintenance account. 

The investor in Atlantic Coast has further to consider the 
fact that its average freight rates are high and that in the event 
of a general determination to reduce railroad rates, these might- 
have to be considerably scaled. On the other hand, a majority 
of the common stock is owned by a holding company and' this is 
the chief source of the revenues of that Company. It may be as- 
sumed, therefore, that the 6% dividend will be maintained just 
as long as the earnings of the company could possibly justify it. 
In other words, the investor may feel that the controlling interest 
of the road is in "strong hands" and that his interest return would 
be guarded by the fact that a reduction in this dividend would 
be of much more consequence to the holding interests than to 
himself. Even supposing, therefore, that a more liberal mainte^ 



ATLANTIC COAST LINE RAILROAD 93 

nance policy would have somewhat reduced the surplus available 
for dividends, the amount still remaining would be quite ample 
to maintain the 6% basis rate. He has further to consider that in 
time of need the company might somewhat enlarge its revenue 
by raising the dividend rate upon the Louisville & Nashville, an 
increase which would be amply justified by the great earnings of 
that line. 

It is not quite clear on what basis the very high quotations 
of 1905-6 were reached, save on the theory that the Atlantic 
Coast Line would take over the Louisville & Nashville under 
lease and that therefore its revenues would be very considerably 
augmented. It should be remembered, however, that the At- 
lantic Coast has only a bare majority and probably no lease could 
be made effective which did not amply satisfy the minority stock- 
holders. This, as already noted, might readily mean an 8% rate 
on Louisville & Nashville, and though, under the exceptionally 
prosperous conditions of 1906 this would have left a large surplus, 
this surplus might not be so heavy under less favorable con- 
ditions. 

Probably from all this, the investor will conclude that At-* 
lantic Coast is a fairly solid 6% stock, but with no such prospect 
as would entitle it to sell much above the general level of other 
6% stocks of the same character. This is to say, that probably 
under the high money conditions prevailing in 1906-7 the stock 
would tend to sell rather towards the low figure reached in the 
beginning of 1907, rising to considerably higher figures were the 
pressure for money to be reduced and the general interest rate to 
decline to around 4%. Supposing such a decline as altogether 
probable, the stock purchased at anything like the figures of 1907 
would likely show a handsome profit if held for the return to 
more normal conditions. 

The stock of the Atlantic Coast Line Company of Connecti- 
cut is not listed on the Stock Exchange and it is very closely held. 
The balance sheet of that company on June 30th, 1906, showed 
securities and other assets of $43,666,711, the larger part of 
which was $24,257,000 of the common stock of the Atlantic Coast 
Line Railroad Company and $1,009,300 of its preferred. Against 
these holdings there were outstanding about $26,000,000 of stock, 
certificates of indebtedness and open accounts, leaving a surplus 
to the credit of profit and loss of $17,575,802. This surplus 
sufficiently reveals the strong financial position of the company. 



BALTIMORE AND OHIO RAILROAD. 

The Baltimore and Ohio was long one of the foremost rail- 
roads of the country, a high and steady dividend payer whose 
stock was prized by investors. Wrecked through rate wars and 
incapable management, it went down in the general collapse of 
1893-7, and its rehabilitation did not begin until the introduction 
of the "Community of Interest" idea. 

Few of the larger roads of America have shown a more rapid 
development in the period that has intervened. Since the road 
Was taken from the hands of receivers in 1899, its mileage has 
been doubled, and its gross earnings are nearly three times as 
great. It follows, therefore, that the mileage earnings have in- 
creased about 50%. 

The very remarkable fact about this astonishing increase in 
earnings is that it is not due to an increasing density of traffic on 
the road, but almost entirely to an increase in rates. In 1899, the 
bedrock year, the average freight rate received by the Baltimore 
and Ohio had fallen to .39c per ton-mile. In 1904 it was .58c, and 
in 1906, .56c — an average increase of nearly 50%. This increase 
is practically the same as the percentage of increase in the earn- 
ings per mile. In other words, had the rates of 1899 been in 
force in 1906, the gross earnings of the Baltimore and Ohio would 
have been eighteen million dollars less than they were, and the earn- 
ings per mile would have been practically the same in that year as 
when the road was in the receiver's hands. This is what "Com- 
munity of Interest" has done for one American road. 

By far the larger part of this increase in rates is represented by 
the increase on a single commodity, that of soft coal tonnage, which 
produces nearly one-half of the freight traffic of the road. 

History. 

The Baltimore and Ohio is one of the oldest of American roads, 
and the oldest of the larger roads continuously in existence. Its re- 
port for 1906 was its eightieth annual statement to its shareholders. 
The road was chartered in 1827 and its first section opened in 1830. 

(94) 



BALTIMORE & OHIO 95 

Its construction was directly instigated by the completion of the Erie 
Canal and it was assisted by loans from the City of Baltimore. It 
was designed as a road from tide-water to the Ohio River. The 
original project was conceived, so it is said, by George Washington. 
The road consisted of iron-plated wooden rails along which tramcars 
ran "at the marvellous speed of nine miles an hour." Soon after its 
inauguration sails were tried as a means of locomotion but speedily 
abandoned. The first steam drawn train dashed along at the rate 
of ten miles an hour, and in 1835 the Baltimore American predicted 
that "before long this unprecedented rate of speed will be raised to 
eighteen and even twenty miles an hour, and the journey to the Ohio 
will some day be performed within twenty- four hours." 

The modern Baltimore and Ohio was largely the creation of 
John W. Garrett, who was its president from 1858 to his death in 
1884. His son Robert succeeded him, and was killed soon after. In 
1887 dividends on the common were passed, and from that time until 
the final collapse of 1896, profits from operation were swept away 
through the persistent recurrence of rate wars. There was a heavy 
increase of capital in 1891, a scrip dividend of 20% and other de- 
vices of "high finance." When the collapse came in the Spring of 
1896, it was found that current expenditures had been charged to 
capital, net earnings largely stuffed,! and Baltimore and Ohio, which 
had been one of the premier investment stocks of the country, sold 
at $9 per share. 

The reorganization was consummated without foreclosure and 
in 1899 the road was returned to its owners. Soon after the re- 
organization the Baltimore and Ohio Southwestern was consolidated 
with the parent road, and control was gained of the Cleveland, 
Lorain and Wheeling ; and several other minor roads were absorbed. 

In 1906 the Baltimore and Ohio directly operated 4,000 miles 
of rails, of which nearly 1,200 miles were double-tracked; and it 
controlled through stock ownership about 500 miles more. Likewise 
through its ownership of one-half of the working control of the 
Reading, its influence extends over the Reading-Central New Jersey 
system, and through the latter its trains obtain entrance into New 
York. 

The principal line extends from Philadelphia through Baltimore 
westward through Maryland, forking at Cumberland into two main 
branches, one extending to Pittsburgh, Lake Erie and Chicago ; the 
other through Cincinnati to Louisville and St. Louis. Enormous 
sums have been expended, especially since 1900, amounting to the 



96 BALTIMORE & OHIO 

practical reconstruction of the road, with heavy rails, heavy equip- 
ment, and the development of the road to the high standard of 
efficiency Of the Pennsylvania lines. 

Ownership. 

In 1900 and 1901, the Pennsylvania obtained practical control of 
the road through the purchase of large blocks of stocks and since that 
time Pennsylvania influence has been dominant in the affairs of the 
road. On January 1st, 1906, it held $30,293,300 par value of the 
common stock, and $21,480,000 par value of preferred stock; 
through the Pennsylvania Company, $5,000,000 preferred, and $11,- 
044,600 common, and through the Northern Central and the Phila., 
Baltimore and Washington (one-half each) of $2,000,000 preferred 
and $1,562,000 common, or about $71,000,000 out of a total of 
$185,000,000 of stock. 

In the fall of 1906 it was announced that the Pennsylvania had 
disposed of about 400,000 shares of its Baltimore and Ohio holding 
together with about one-half its holding in the Norfolk and Western, 
to Messrs. Kuhn, Loeb and Company; further, that this stock had 
been taken over by Harriman-Union Pacific interests, who were 
understood to be already large holders of stock in the road ; Messrs. 
Harriman and Stillman had been for some time on the board of 
directors. 

This purchase was generally accepted as indicating a purpose 
on the part of the Union Pacific interests to hold a trans-continental 
line in imitation or in competition with the Gould transcontinental. 

In 1906, the board of directors was made up of four representa- 
tives of the Pennsylvania: John P. Green, James McCrea, Samuel 
Rea and John B. Thayer; and these with Oscar G. Murray, presi- 
dent, and George F. Randolph, vice-president, made the Pennsyl- 
vania interests dominant in the Board. With the sale of the Penn- 
sylvania's holdings, Mr. Thayer retired and was succeeded by 
Joseph R. Foard, president of the Foard Lighterage Company of 
Baltimore. The other directors were : Charles Steele, representing 
the Morgan interests ; Norman B. Ream, prominent in the Erie 
management, and also closely associated with Morgan interests ; 
James Speyer, of the banking house of Speyer and Company ; Ed- 
ward H. Harriman, also a director in the Erie and the Delaware 
and Hudson; James Stillman, also a director in the New York 
Central, the Delaware and Lackawanna, the Union and Southern 



BALTIMORE & OHIO 97 

Pacific; and Edward R. Bacon, vice-president of the subsidiary 
Baltimore and Ohio and Southwestern. 

Mr. Jacob H. Schiff, of Kuhn, Loeb and Company had been a 
director up to 1906, but resigned in that year, and his place was 
taken by R. Brent Keyser, of Baltimore. In the same year the 
Baltimore and Ohio acquired by purchase 55,000 shares of stock of 
the Washington Branch road held by the state of Maryland, through 
which the state of Maryland had been entitled to two representatives 
on the board of directors, and these two representatives of the state 
were therefore retired. 

For so large a road the stock of the Baltimore and Ohio is not 
widely held as in former days, the company reporting 7,132 share- 
holders in 1905, as against 44,000 for the Pennsylvania. 

Affiliations. 

When the Pennsylvania had also acquired practical working 
control of the Norfolk and Western, and become dominant, with 
the Vanderbilt interests, in the Chesapeake and Ohio, and when in 
turn the Baltimore and Ohio had gained control of the Reading, 
through stock ownership, this brought all of the eastern soft coal 
roads under practically a single ownership. To this is due the re- 
generation of the Baltimore and Ohio, as well as the Chesapeake and 
Ohio, and the Norfolk and Western. In 1899, the Baltimore and 
Ohio was receiving on its soft coal tonnage only .26c per ton-mile ; 
in 1906 the average rate was .40c — an increase of more than 50%. 
The general increase of rates has been parallel to this, so that the 
average of all tonnage has been raised by about 50%. 

In the case of these southerly roads, community of interest 
amounts practically to single ownership, with the absolute elimin- 
ation of competition throughout the very extensive territory covered 
by the Pennsylvania, Reading and Baltimore and Ohio lines. In 
1905, and 1906, this monopoly was broken through the purchase of 
the Western Maryland by the Goulds; by the construction of the 
Deep Water and Tide Water railroad by Mr. Rogers, and the situ- 
ation was further complicated by the Union Pacific's purchase of 
Baltimore and Ohio stock. ' 

Capitalization. 

Under the reorganization and subsequent consolidations, the 
capital account of the Baltimore and Ohio's lines were greatly sim- 
plified, so that the balance sheet of the company presents the exact 
capitalization. On June 30th, 1906, this account stood as follows : 

7 : 



98 BALTIMORE & OHIO 

Capitalization, 

Common stock $124,580,000 

Preferred stock 60,000,000 

Total stock $184,580,000 

Funded debt 246,849,430 

Assumed debt 11,177,416 

Total capital $442,606,846 

Securities held 50,721,919 

Approx. net capital $391,884,927 

Approx. net capital per mile $97,241 

Average miles operated 4030 

Net earnings on net capital 7.1% 

Stock on net capitalization 47% 

Fixed charges on total net income. . 39% 

Factor of Safety 61% 

In the above estimate of capitalization, the new issue of $27,- 
750,000 of common stock has not been included. Issued in April of 
1906, only a little more than $10,000,000 had been paid, and this 
stock has been omitted because it did not share in the earnings or 
in the dividends of the fiscal year of 1906. 

Though the securities owned are carried on the books at con- 
siderably below their actual value, they are entered in the above 
table at the company's estimate. 

It will be seen that the estimated net capitalization is neither 
high nor low. With gross earnings on the road of $19,000 per mile, 
its $97,241 of net capital per mile of road compares with $145,000 
for the Pennsylvania, with gross earnings of $37,661 per mile. This 
same figure compares with $96,108 per mile for the Norfolk and 
Western, whose mileage earnings are considerably lower, and with 
$77,142 per mile for the Chesapeake and Ohio. 

Comparing the net earnings of these four roads, it will be seen 
that their estimated net capitalization is on a very even basis. The net 
earnings of the Baltimore and Ohio represent 7.1% on the net capi- 
talization; the Pennsylvania 8.1% ; the Norfolk and Western, 6.4% ; 
and the Chesapeake and Ohio 7%. 

The Baltimore and Ohio collapsed in 1896, not because of any 
large shrinkage of earnings but from the fact that its Fixed Charges 
had been eating up steadily increasing proportions of its net income, 



BALTIMORE & OHIO 99 

until finally default was made. In the reorganization, Fixed 
Charges were heavily scaled, so that at the present time the stock 
represents very nearly one-half of the net capitalization, while the 
Fixed Charges consume only about 40% of the net income, leaving 
a Factor of Safety for the underlying securities of about 60%. 

It should be understood, however, that the Factor of Safety 
figured above is based upon the earnings of the road from year to 
year, and that the figure of 60% for 1906 was attained through 
average freight rates 50% higher than they were in 1899, and in a 
year of fabulous prosperity. Furthermore the earnings of the road 
are pivoted on the single industry of soft coal carriage and the high 
factor has therefore nothing like the same significance that it would 
have on a road whose traffic was more widely distributed, or whose 
earnings had risen less rapidly than those of the Baltimore and Ohio. 

Equities Owned. 

Stocks and bonds in the treasury of a par value of about $64,- 
000,000 are carried on the company's books at a valuation of -$50,- 
721,919. Of these $18,500,000 were bonds, of which $15,433,954 
were the road's own securities. The treasury likewise carries 
$1,098,560 par value of Baltimore and Ohio preferred and $40,662, 
of common. Of the securities held by far the largest item is the 
Reading stock which consists of $6,065,000 par value of the first 
preferred, $14,265,500 of the second preferred, and $10,002,500 of 
the common. These stocks at 1906 market prices had a market 
value of upwards of $33,000,000. In addition to them the road had 
upwards of $14,500,000 par value of other securities, including its 
own stock, and $1,154,000 par value of Lehigh. Both of the latter 
were worth much more than par. 

All the stocks, including the Reading, were carried on the books 
at $32,149,847. This is obviously very much below their market 
value. Furthermore, the company received in dividends and in in- 
terest on its securities owned, $3,048,663 in 1906. This on a 4% 
basis would give these securities a valuation of about $75,000,000, 
or $25,000,000 in excess of their book value. 

Reference to the analysis of the Reading's affairs will show 
that this company in 1906 was comfortably earning 6% or 7% on 
its common stock over and above liberal maintenance charges, and 
large appropriations for improvements and depreciations. In other 
words, it might have as legitimately declared dividends to these 
amounts as the Pennsylvania or the Baltimore and Ohio itself. All 
of the Baltimore and Ohio's equity in the Reading is represented by 

L0FC. 



100 



BALTIMORE & OHIO 



its $10,000,000 of common stock, which is one-seventh of the total. 
Estimating that the surplus earnings of the Reading, after reason- 
able improvements and preferred dividends, left a surplus for the 
common stock of from $5,000,000 to $7,000,000, the Baltimore and 
Ohio's equity in the balance over and above the 4% dividend de- 
clared, amounted in 1906 to something like $700,000 to $1,000,000. 
The purchase of these stocks was made in 1901. At that time 
the average price of the first preferred was $75, of the second pre- 
ferred $50, and of the common $40 per share. If the purchase price 
were somewhat near these average figures for 1901, these Reading 
securities should have cost the Baltimore and Ohio from $15,000,000 
to $16,000,000, so that their market valuation in 1906 of upwards of 
$33,000,000 would represent a profit to the road of from $15,000,000 
to $17,000,000, or more than one hundred per cent, on the invest- 
ment. 

Increase of Capitalization. 

From the table that follows it will be seen that the capitalization 
of the road has increased rather heavily since the consolidation Of 
the system in 1900, the larger part of this increase having been com- 
mon stock. 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900 
1906 


$45,000,000 
124,580,000 


$59,357,167 
60,000,000 


$198,435,529 
258,026,846 


$302,792,696 
442,606,846 


$42,117,405 
77,392,056 



Increase of 6 years: Total capital, 46%; gross earnings, 83%. 

It will be seen that the funded debt has increased only about 
30% ; the preferred has remained stationary ; while the common has 
risen from $45,000,000 to $124,580,000 in 1906. With the new 
issues the amount of common stock becomes $152,330,000 for the 
year of 1906-7. 

It is to be noted that the gross earnings have increased nearly 
twice as fast as the increase in capitalization, but as already ex- 
plained this increase of earnings is due largely to the raise in the 
average freight rates. 

The larger part of the road's expenditures has been for double 
tracking, new equipment, relaying track with heavier rails, and the 
general building up of the road to a "Pennsylvania standard." It 
yet remains to be seen whether this will prove as highly profitable, 
in net profits, as had been anticipated. 



BALTIMORE & OHIO 101 

Character of Traffic. 

To a greater extent than most of the large eastern roads, though 
not to the same extent as the Norfolk and Western for example, the 
Baltimore and Ohio is a freight road, and like almost all of the large 
eastern lines except the New York Central, the larger part of its 
freight earnings is due to the carriage of coal. 

In 1906 products of the farm made up only 7% of its tonnage, 
manufactures only 17%, and products of mines, 64%. 

Unlike most of the other large coal roads, except its two south- 
erly competitors, the Norfolk and Western and the Chesapeake and 
Ohio, the Baltimore and Ohio's coal carriage was almost exclusively 
bituminous coal. This made up in 1906 40% of its gross tonnage, 
while the coal tonnage of the Reading, for example, is divided almost 
equally between anthracite and bituminous. Baltimore and Ohio 
has next to no anthracite. 

Broadly speaking, the prosperity of the Baltimore and Ohio 
therefore is pivoted on the soft coal industry and the maintenance 
of soft coal rates. This is undoubtedly an element of weakness, but 
it would be so in a far greater degree but for a remarkable fact. 
In the fifty years preceding 1865, the anthracite coal production of 
the United States exceeded the bituminous. In the year named the 
production of the two varieties was about equal. In the inter- 
vening forty years, anthracite coal production has risen from about 
10,000,000 tons to 69,000,000 while bituminous has risen from the 
same figure to 255,000,000. The one has increased less than seven 
times; the other has increased twenty-five times. The simple fact 
appears to be that the labor cost against the power value of anthra- 
cite coal is notably higher than that of bituminous coal; otherwise 
there could have been no such extraordinary difference in their 
development. It is true that the anthracite fields are very limited, 
while the bituminous coal fields are spread all over the country from 
the Atlantic to the Pacific, and it goes without saying that the cost 
of carriage from the mine mouth to the point of consumption aver- 
aging for the bituminous coal a very much shorter haul, has played 
and will continue to play a very large role in the relative use of the 
two coals. The rate of increase in the anthracite coal production 
grows less and less, decade by decade, while that of bituminous coal 
tends to rise rather than fall. 

Far-sighted investors then will balance two facts : The first that 
even on a pre-eminently anthracite line like the Reading, bituminous 
coal carriage is increasing much more rapidly than the anthracite, 



102 



BALTIMORE & OHIO 



and the second that competition in the bituminous coal industry is 
much more widely distributed and therefore in times of stress much 
more subject to competitive reduction in price. So far as the Balti- 
more and Ohio is concerned, then, its chief source of revenue is an 
industry over which it is far more difficult for any single road or set 
of roads to gain control, and as the fields of the West, Colorado, 
Wyoming, Washington, and other states develop^ this competition 
will become keener rather than less. 

On the other hand, it is very noteworthy that in the very 
remarkable year of 1906, the general tonnage of the road in- 
creased 17% while the coal tonnage increased only 10%. Up to 
1906 it is equally remarkable that there had been in the previous 
five years practically no increase in the traffic density' of the road. 
This will be seen by reference to the table of traffic density under 
maintenance. 



Stability of Earnings. 

Reference has already been made to the fact that between 
1896 and 1905 the mileage of the Baltimore and Ohio directly 
operated had doubled, while its gross earnings trebled. In the 
meantime the increase in gross earnings per mile was very slow. 
In 1901, earnings had reached only nearly $15,000 per mile, and 
they did not show any notable increase until the astonishing 
jump in 1906, when they reached $19,200 per mile. All this is 
set forth in the following table : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


2,089 


$23,944,781 


$11,461 


1896-7 


2,031 


25,582,122 


12,644 


1897-8 


2,006 


27,722,788 


13,819 


1898-9 


2,023 


28.404,922 


14,159 


1899-0 


3,181 


42,117,405 


13,236 


1900-1 


3,216 


47,114,430 


14,649 


1901-2 


3,233 


51,178,061 


15,829 


1902-3 


3,935 


63,449,633 


16,124 


1903-4 


3,987 


65,071,081 


16,320 


1904-5 


4,026 


67,689,997 


16,813 


1905-6 


4,030 


77,392,056 


19,204 



Reference to the column of traffic density in the table that 
follows will show that likewise until 1906, there had been no 
notable increase in the ton-miles per mile of road. To restate 
what has already been clearly indicated, the fine showing which 
the road has made since its reorganization has been due almost 



BALTIMORE & OHIO 



103 



entirely to the increase in rates, and these in turn have been very 
largely due to increase in coal rates. 

The paramount question which faces the investor in Balti- 
more and Ohio is whether present rates can be maintained, and 
especially coal rates. The increase in coal rates of nearly 50% 
has been in the face of a very slight increase of freight rates all 
over the country at large, and a very heavy decline in freight 
rates on western roads. In 1899, the bedrock year, the average 
freight rate for the whole of the United States was .73c per ton 
per mile; in 1904 it was .78c; an increase of a little over 6%. 
The total freight bill for the whole of the United States in 1906 
amounted to somewhere around a billion and a half of dollars ; 
a general increase of 50% in rates would have added to the 
freight bill of the country upwards of $700,000,000 per year. 
In times of prosperity such an increase as the Baltimore and Ohio 
has enjoyed may pass without protest, but it clearly seems pos- 
sible that if a time of stress should come, this amazing pros- 
perity of the railroads would not fail to arouse agitation for lower 
rates. Obviously the wisest thing which the roads can do is to 
put their properties in the best possible condition to meet such a 
change, and this is what the Baltimore and Ohio has done. 

Maintenance. 

It will be seen from the following that with an increase in 
traffic density of only about 20%, the Baltimore and Ohio has 
increased its total maintenance charges per mile an even 50%. 
The items stand as follows: 





Traffic Density 


Maintenance per Mile 


Total 


Year 


Way 


Equipment 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


2,220,614 
2,318,443 
2,181,518 
2,096,739 
2,218,966 
2,659,949 

2,282,704 


$1,779 
1,939 
1,569 
1,703 
1,950 
2,315 


$1,898 
2,077 
2,101 
2,602 
2,717 
3,105 

$2,416 


$3,677 
4,016 
3,670 
4,305 
4,667 
5,420 


Average 


$1,876 


$4,292 



Miles o 


f extra main track, 1,182. 








Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 


Pennsylvania. 

Norfolk & W. 
Erie 


3,862,125 
2,057,510 
2,190,314 
2,764,827 


$3,648 
1,387 
1,563 
1,861 


$4,983 
1,995 
1,903 
3,216 


$8,631 
3,382 
3,466 
5,077 







104 BALTIMORE & OHIO 

Undoubtedly the charges on the Baltimore and Ohio, espec- 
ially in 1905-6, were heavy. Yet when they are compared, for 
example, with those of the Pennsylvania, it will be noted that the 
Pennsylvania's average maintenance charges for a period of six 
years have been more than twice those of the Baltimore and 
Ohio on a traffic density only 75% greater. Compared with the 
Erie, maintenances have been about even ; compared with the 
Chesapeake and Ohio and with the Norfolk and Western, Balti- 
more and Ohio's charges have been considerably higher; that is 
to say from $500 to $600 per mile more, traffic density considered. 

Yet another noteworthy fact is that with a much lower per- 
centage of double track, both the Norfolk and Western and the 
Chesapeake and Ohio have been able to handle very nearly the 
same amount of traffic per mile. The enormous outlay which 
the road has made for double-tracking, heavier rails and the 
like, has undoubtedly put it in a better position for future traffic, 
but the traffic density of the Norfolk and Western, with only 185 
miles of double track, was actually higher than that of the Balti- 
more and Ohio in 1906. Its rate of increase was more rapid than 
the latter, which had nearly 1,200 miles of double track. There 
is here the eternally recurrent problem as to where a double track 
becomes profitable. 

Meanwhile it seems to be clear that the maintenance of the 
Baltimore and Ohio has been ample, and that it is in an admir- 
able position for a large increase of business, should this business 
come. I 

Improvements. 

In addition to enormous capital expenditures, the Baltimore 
and Ohio has systematically set aside since its reorganization 
very large sums for the same purpose from its surplus earnings. 
These for a series of years have been as follows : 

1899-0 $2,540,230 

1900-1 2,740,932 

1901-2 2,765,194 

1902-3 4,073,000 

1903-4 2,408,650 

1904-5 2,979,454 

1,500,000 (Depreciation of Equipment) 
1905-6 1,500,000 

4,066,038 

Total $24,573,498 



BALTIMORE & OHIO 105 

This amount is undoubtedly large, amounting to an average 
expenditure of over $6,000 for every mile of road. It is of 
course nothing like the $58,447,000 set aside by the Pennsyl- 
vania, but the Pennsylvania's earnings and profits were enor- 
mously greater. It is nothing like the $25,271,000 similarly ap- 
propriated by the Lackawanna on less than a thousand miles of 
road, but it compares very favorably with the $10,027,000 set aside 
by the Reading; the $10,794,000 set aside by the Erie; and the 
$5,713,000 set aside by the Lehigh Valley. It is quite certain that 
the Baltimore and Ohio has been abreast of the foremost roads 
which have turned back a large part of their earnings into 
improvements. 

Surplus Earnings. 

In analysing the following table of surplus shown, it will be 
seen that a very large part of the 83% increase in surplus earn- 
ings, has been absorbed by the increase in capitalization; that is 
to say, to 1906, the surplus shown averaged around 11%. This 
may be stated in quite another way much more favorable to the 
road. This is that while the Baltimore and Ohio has been carry- 
ing out improvements on a huge scale, and increasing its capital- 
ization by nearly 50%, it has still been able to increase its surplus 
at practically the same rate, and show about the same amount 
from year to year earned on the common stock. 

The increase in the year 1906 is especially noteworthy, but a 
reference to the increase of earnings for the same period will 
show that this high percentage has not been attained through 
mere bookkeeping, but in the face of a heavy increase of mainte- 
nance charges. It is to be noted that the surplus here shown for 
1906 over previous years is slightly in excess of the net income 
shown by the reports, which have deducted from a half a 
million to a million dollars annually of "Miscellaneous Improve- 
ments" which were included among Fixed Charges. These 
amounts have been added to the net income shown in the reports 
in each instance, and therefore slightly increase the nominal per- 
centage shown as available for improvements and common stock 
dividend. 



106 



BALTIMORE & OHIO 







Dividend 


Per Cent. 


Dividend 


Average 
Price 


Year 


Surplus 


paid on 


Earned on 


paid on 






Preferred 


Common 


Common 


1900-1 


$ 7,637,613 


4 


11.6 


4 


99 


1901-2 


10,324,883 


4 


10.4 


4 


105 


1902-3 


14,905,133 


4 


10. 


4 


85 


1903-4 


12,766,010 


4 


8.3 


4 


85 


1904-5 


14,153,248 


4 


11. 


^A 


110 


1905-6 


19,130,337 


4 


15.4 


sy 2 


112 



Averaging the percentages shown, it will be seen that the 
surplus nominally available for the common stock dividend has 
amounted to 11% per annum for the six years. This is slightly 
better, for example, than the Pennsylvania and the increase of the 
dividend on the common stock to a six per cent basis in 1906 
obviously had ample justification. 

Dividend Record. 

In the old Garrett days Baltimore and Ohio dividends were 
considered almost as solid as those of the New York Central or 
Pennsylvania. For six consecutive years from 1881 the road 
paid 10%, but in the demoralization that followed the death of 
the elder Garrett, earnings steadily dwindled until they disappeared 
entirely. It will be seen that since the reorganization, dividends 
on the common have been steadily increased, in 1906 the stock 
being placed on a 6% basis. The record for thirty years is as 
follows : 



Year 


Common 


Preferred 


1877 


8 




1878 


8 (stock) 




1879 


4 and 4% stock 




1880 


9 




1881-5 


10 




1886 


8 




1887 


4 




1888-90 






1891 


20 stock 




1892 


3# 




1893 


5 




1894 


4^ 




1895-99 


Reorganization 




1900 


2 


4 


1901-4 


4 


4 


1905 


4^ 


4 


1906 


sy* 


4 



BALTIMORE & OHIO 107 

The Balance Sheet. 

Deducting from the current assets the amounts advanced to 
other companies, as is customary, and excluding the item of ma- 
terials on hand, the balance sheet at the close of the fiscal year of 1906 

showed current assets $23,899,696 

and current liabilities 22,675,257 

leaving a working balance of $1,224,439 

In addition to the above assets, there was due from the Balti- 
more and Ohio Equipment Company, $13,900,408, and from other, 
probably subsidiary companies, $10,391,230. 

Of the current assets the item of cash represented $8,890,830. 

The balance to the credit of Profit and Loss was $15,823,643, 

as against $9,135,287 for the previous year. In other words, after 

all deductions for interest, dividends, etc., the road carried to this 

account a credit of $6,688,355 of undistributed net surplus. 

Investment Value. 

It is certainly a very remarkable showing that the Baltimore 
and Ohio has made since its reorganization. In the third year after 
it was taken from the receivers' hands it was showing more than 
11% net surplus for its common stock, and that showing has been 
averaged in the five succeeding years. With this showing, with 
the consolidation of the southern coal roads under practically one 
ownership, and with the powerful backing of the Pennsylvania, and 
the fine management which characterizes all of the company's under- 
takings, the B. & O. stock in general should have shown more or 
less corresponding quotations. 

The preferred stock is limited to 4% non-cumulative dividends. 
These have been paid since 1900, the year after the reorganization, 
and since this time the stock has ranged between $83 per share and 
par. In 1906, under the prevailing high rates of interest, its range 
was between $92 and $99 per share. With a margin of safety for 
the funded securities of about 60%, such as that shown in 1906, 
and with the amount of preferred stock less than half the common, 
the preferred is entitled to be regarded as a solid stock whose 
security is likely to increase rather than diminish. Its price, there- 
fore, will be determined by the average savings bank rate for money, 
with the further possibility that it might be desired for the purposes 
of control. 

In 1900, Baltimore and Ohio common, on a 2% basis, sold as 
high as $90 per share, and on the doubling of the dividend in the 



108 BALTIMORE & OHIO 

following year, sold up to $118 per share in the boom of 1902. In 
the slump of 1903-4, it sold down as low as §72 per share, rising 
again to $117 in 1905, and with the placing of the stock on a 6% 
basis in 1906, it touched $125. In the same year the Pennsylvania 
on a 6% basis and the New York Central on a 5% basis, were 
habitually selling twenty to twenty-five points higher, and the Read- 
ing on a 4% basis even more. Yet with ample maintenance charges 
the surplus shown for B. & O. common was very considerably in 
excess of that shown for the Pennsylvania. It was more than twice 
that shown for the New York Central and more than the percentage 
shown for the Reading. It is not very easy to explain the anomaly 
and there are undoubtedly many who purchased the stock in the 
belief that this obvious discrepancy would be reduced. The fact can 
be due only to the caution engendered by the sources of the Balti- 
more and Ohio's unquestioned prosperity. The mileage earnings 
of other roads have increased very much more rapidly than have 
those of the B. and O. and on a far broader and firmer basis of 
traffic. The Reading, the Pennsylvania and all of the eastern roads 
have likewise been benefited to a considerable degree by an increase 
in freight rates, but in nothing like the same degree as the B. and O. 
These other roads could go back to the rates of 1899 and not be 
seriously crippled. The B. and O. could not. It could not reduce 
its gross earnings of 1906 by $18,000,000, and at the same time scale 
its operating charges sufficiently to leave any considerable profit to 
the shareholders. It is not probable, for example, that its mainte- 
nance charges for 1906 could be scaled a full $1,500 per mile with- 
out impairing the condition of the road, and this on its 4,000 miles 
of track would amount to only $6,000,000. It is evident that in- 
vestors have not lost sight of the fact that B. and O. prosperity is 
conditioned in and has been brought about by an increase of freight 
rates. If these rates can be maintained there seems no reason why 
its stock should not steadily pay a six per cent, dividend, even if 
some setback in business should come. It seems to be fairly evident 
that experienced railroad managers like Mr. Harriman and his 
partners would not buy a huge block of the stock of the road unless 
they regarded it as full of possibilities, at least to them, and the 
stock well worth its market price. In justice to its shareholders the 
Pennsylvania could not have sold this stock at much below the 
market price, and if the interests which have made so magnificent 
a success of the Union Pacific did not regard this valuation as ex- 
cessive, it is not very reasonable that the investor should have 
greater fears. 



BALTIMORE & OHIO 109 

On a six per cent, basis, with money at 4%, a solid 6% stock 
is entitled to sell around $150 per share; but by reason of the nar- 
row basis of its prosperity, it is probable that the Baltimore and 
Ohio will tend to sell rather under other 6% stocks actually showing 
less favorable surpluses than the B. and O. That is to say, the stock 
presents a greater risk. The investor will ask a higher yield of 
interest than on stocks which he regards as on a more solid foun- 
dation. On the other hand, should the Baltimore and Ohio come 
wholly under Harriman interests, and become the eastern outlet of 
the Harriman-Union-Southern Pacific system, its traffic and its 
earnings might acquire a much higher degree of solidity with ex- 
cellent guarantees as to management and results. 

In the very moderate decline of 1906, with every prospect of 
an increase of dividend, the stock sold at $105 per share; in the 
heavier recession of March, 1907, it sold at $90. Were the 
investor able to secure it at anything like these figures, he should 
reflect that . the surplus shown might at a pinch be cut nearly in 
halves without threatening his dividend, and that with the return 
of more favorable conditions the stock might readily sell at from 
$120 to $140 per share, and even higher in a market boom. There 
are not lacking casuists to maintain that a previous record of bad 
management offers the highest sort of possibilities for an investor, 
and if this be true it would be difficult to cite a more promising 
speculative stock than Baltimore & Ohio. 



BOSTON AND MAINE RAILROAD. 

The Boston and Maine, which in 1907 was practically absorbed 
by the New Haven, was the most important railway system in New 
England outside the New Haven road. In 1906 it operated directly 
2,287 miles, against 2,062 for the New Haven, and through its stock 
ownership in the Maine Central controlled 816 miles more, carrying 
the total to well over three thousand miles. The Maine Central is 
operated separately, though under practically the same manage- 
ment. 

The present Boston and Maine represents the consolidation in 
1890 of the Boston and Maine, the Eastern, and the Portsmouth, 
Great Falls and Conway Railroads, but prior to this the road had 
acquired control, by lease, of the old Boston and Lowell, the Con- 
cord and Montreal and several smaller lines. In 1900 the road 
began to operate, under a 99 years lease, the Fitchburg and leased 
lines, aggregating 457 miles of road, and in 1901 the company pur- 
chased the capital stock of the Central Massachusetts R. R. 

By the consolidation with the New Haven, practically the whole 
transportation system of New England, outside of the New York 
Central's Boston & Albany line, came under a single management. 
The New Haven's relations with the New York Central are har- 
monious, and New England is not troubled with rate wars. 

The Boston and Maine lies mainly in Massachusetts and New 
Hampshire, about one-half of it being in the latter state; 511 miles 
or nearly 25% of the line is double tracked. The road operates 
through a territory that is at about a standstill as far as develop- 
ment goes ; but through the growth of the cities its traffic rises 
steadily. 

Ownership. 

The Boston and Maine is one of the most widely held roads in 
the Union, reporting in 1905 7,402 shareholders. This is a little 
over 40 shares per shareholder, representing an average investment 
of about $6,500. 

The directorate of 1906 included Lucius Tuttle, president; 
Richard Olney, ex-Secretary of State ; Henry M. Whitney, a very 
large New England capitalist; and Alexander Cochrane, Boston; 

(110) 



BOSTON & MAINE 111 

Samuel C. Lawrence, Medford ; Joseph H. White, Brookline, Mass. ; 
Lewis Cass Ledyard, Henry F. Dimock, and Charles M. Pratt, (of 
the Standard Oil Company), New York; Alvah W. Sulloway, 
Franklin, N. H. ; Walter Hunnewell, Wellesley, Mass. ; and Wil- 
liam Whiting, Holyoke, Mass. 

These are practically all New England capitalists, indicating 
the local ownership of the road. 

Capitalization. 

The nominal capitalization of the Boston and Maine is low, 
amounting in 1906 to only $59,000,000, or an average of about 
$26,000 per operated mile. In point of fact the system is largely 
made up of leased lines and its rental payments on these amounted 
in 1906 to $5,075,000, almost four times the interest on its nominal 
funded debt. When these rentals are capitalized at 4%, following 
the custom of this book, the capital account, for 1906, was as 
follows : 

Common stock $24,638,070 

Preferred stock 3,149,800 

Total stock $27,787,870 

Bonded debt 31,305,543 

Nominal capital $59,093,413 

Rentals cap. at 4% 126,862,500 

Approximate gross capitalization. . . .$185,955,913 
Securities held 10,535,094 

Approx. net capitalization $175,420,819 

Est. net capital per mile $77,660 

Average miles operated 2,287 

Net earnings on net capitalization. . 5.6% 

Stock on net capitalization 16% 

Fixed Charges on Total Net Income 78% 

Factor of Safety 22% 

The Boston and Maine itemizes the stocks and bonds of its 
leased lines, and these amount to $60,000,000 of stocks and $46,- 
000,000 of bonds. When these two items have been added to the 
nominal capitalization of the Boston and Maine proper, the actual 



112 BOSTON & MAINE 

amount rises to over $165,000,000, which sum compares with the 
$185,000,000 here estimated as the gross capitalization of the road. 

The securities owned are apparently carried at practically the 
par value of the stocks and bonds, including several items, in par- 
ticular the 24,000 shares of the Maine Central stock, which are 
worth far in excess of this valuation. The total, however, is small, 
and does not greatly affect the estimate here made. This estimate 
shows a net capitalization of $77,660 per mile operated. This com- 
pares with $103,741 for the New Haven, which latter, however, 
shows gross earnings more than half again as large as the Boston 
and Maine. 

Compared with the Net Earnings, the Boston and Maine's capi- 
talization is rather high, its figure of 5.6% of net earnings on net 
capitalization comparing with 8.2% for 'the New Haven ; and 8.4% 
for the subsidiary Maine Central. 

The percentage of Fixed Charges on Total Net Income is very 
high, the Fixed Charges consuming 78%. Over 60% of this item 
is represented by rentals paid. The leases mainly take the form of 
fixed dividends on the stocks of the leased roads and a guarantee of 
their securities. Were the Boston and Maine other than a solid, 
even-running road, its Factor of Safety for its own securities, and 
on its guarantees of leased roads would be very low. As a matter 
of fact, the road has been able steadily to meet its obligations with- 
out embarrassment, and it is obvious that its securities as well as its 
stock are highly prized by New England investors. 

Equities Owned. 

The chief item of treasury holding is 54,547 shares of the com- 
mon stock of the Fitchburg road. The guarantee on this stock is 
only one per cent. 

The holdings of par value of $2,516,000 of the Maine Central 
represents on the average price of this stock in recent years, nearly 
double this sum. 

The only other important holding was $1,293,559 par value of 
the Boston and Maine's own stock, worth above $160 per share. 

The various stocks and bonds held by the Boston and Maine 
yield a revenue of only $255,000 per year, which on a 4% basis 
would not greatly raise the valuation at which they are carried on 
the company's books. 



BOSTON & MAINE 113 

Increase of Capitalization. 

In the five years from 1901 the increase of capitalization has 
been very slight, amounting at the close of the fiscal year of 1906 
to only a little over $4,000,000. The total increase in the amount of 
the dividends, disbursements and Fixed Charges has only been 
$454,224. Within the same period its gross earnings have in- 
creased $8,460,000 and practically all of this increase of income has 
been turned back into the road. During 1906 th6 company refunded 
over $10,000,000 of its obligations, resulting in a saving of $267,000 
per annum. 

During 1906 the company offered for sale $4,203,000 par value 
of new stock, together with the amount of stock in its treasury. At 
the date of the annual report for 1906, $3,627,000 par value of these 
shares had been sold. 

The balance is required by law to be disposed of by public 
auction. The price fixed by the Railway Commissioners of Massa- 
chusetts, Maine and New Hampshire was $165 per share. The in- 
crease of dividend charge through this new stock will be more than 
offset by the saving in Fixed Charges referred to. 

The premiums received through a series of years upon all the 
stocks of the Boston and Maine outstanding, including the 1906 
issue, has produced for its treasury a total of $39,289,000, an excess 
over its nominal capitalization of nearly $14,000,000, the average 
price of the stock being $152 per share. This is another evidence of 
the fact that the capitalization of a railroad is more or less a matter 
of bookkeeping and if the matter of premiums had been included in 
the estimate of capitalization above, the gross amount shown would 
have been increased by about the $14,000,000 noted. 

Under the laws of Massachusetts, Maine and New Hampshire, 
the price at which new stock is issued is fixed by the railway com- 
missions of these states and is supposed to represent a near estimate 
of the actual value of the stock, so that the value of the "rights" on 
this new stock was very small. 

Character of Traffic. 

The passenger business of the Boston and Maine amounts to 
$15,000,000, or about 37% of the gross earnings from operation. 
The freight traffic is widely distributed, the business of the road 
being very general. The main item is coal, which, however, forms 
only about 25% of the total tonnage, and the next largest item, 
lumber, represents only about 12%. 



114 



BOSTON & MAINE 



Stability of Earnings. 

Since the addition of the Fitchburg R. R. by lease, the mileage 
of the system has increased but slightly, while the gross earnings 
have increased more than 35%. Over a period of ten years the 
average earnings per mile have increased from $11,383 to $17,147, 
an increase of 55%. This is shown in detail in the following table: 



Year 


Miles Operated 


Gross Earnings 


Earnings per Mile 


1896-7 


1,718 


$19,556,687 


111,383 


1897-8 


1,715 


19,742,945 


11,506 


1898-9 


1,715 


19,890,607 


11,598 


1899-0 


1,752 


22,148,602 


12,641 


1900-1 


2,257 


30,406,907 


13,472 


1901-2 


2,265 


31,606,322 


13,954 


1902-3 


2,280 


33,537,491 


14,709 


1903-4 


2,285 


34,705,230 


15,188 


1904-5 


2,288 


36,017,074 


15,741 


1905-6 


2.287 


39,214,202 


17,147 



It will be seen that this increase is very steady and is marked 
by no setback from one year to another. It is this evenness of earn- 
ings which gives to the Boston and Maine its solidity. 

Maintenance. 

It will be seen from the following table that the traffic density 
of the road has increased about 30%, and the total expenditures for 
maintenance per mile 35%. This is nothing like the usual showing 
for American roads within this period and it is evident that the 
maintenance charges have been very carefully adjusted with an eye 
to maintaining the road's 7% dividends. In comparison with the 
New Haven, with about an equal freight traffic density and about 
the same percentage of second track, the Boston and Maine's charges 
are low, but it should be remembered that the average earnings of 
the New Haven road, per mile, are more than 50% higher than the 
Boston and Maine. 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


686,006 
715,391 
757,030 
756,421 
810,371 
879,992 

767,535 


$1,513 
1,760 
1,609 
1,676 
1,967 
2,353 

$1,813 


$1,438 
1,477 
1,394 
1,595 
1,838 
1,460 

$1,533 


$2,951 
3,237 
3,003 
3,271 
3,805 
3,813 


Average 


$3,346 



Miles of extra main track, 521. 



BOSTON & MAINE 



115 





Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 


New Haven .... 
N. Y. C 


787,816 
2,096,289 


$2,786 
2,741 


$2,408 
3,169 


$5,194 
5,910 





There has been a lively complaint that the road has not followed 
a policy of improvement and betterment in keeping with the rest of 
the roads of the country, and in 1906 the character of the Boston 
and Maine service in New Hampshire was the dominant political 
question in that state. The policy of the road is undoubtedly ex- 
tremely conservative, and the need of an improved service has been 
recognized by the road in the sale of additional stock for providing 
funds for betterments. 

Improvements. 

The report states that the following amounts have been included 
in the operating expenses, appropriated under separate headings for 
new equipment: 

1901-2 $563,239 

1902-3 170,370 

1903-4 350,988 

1904-5 807,782 

1905-6 1,026,427 



Total $2,918,806 

The total expenditures for new equipment for 1906 amounted 
to $2,455,000, the balance having been charged to capital account. 
Much heavier appropriations than this were needed in 1907. 

Surplus Earnings. 

In the six years from 1901-06 the surplus shown has not greatly 
increased, it being evident that the operating expenses were adjusted 
to meet the regular dividends. The following table shows the con- 
ditions for the six years under view : 



Year 


Surplus 


Dividends on 

Preferred 

Stock 


Per Cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Av'age price 

(Calendar 

Year) 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


$1,690,413 
1,786,726 
1,793,908 
1,849,456 
1,883,572 
2,051,919 


6 
6 
6 
6 
6 
6 


6.4 
6.7 
6.6 
6.9 
6.8 
7.9 


7 
7 
7 
7 
7 
7 


194 
199 
178 
166 
178 
175 



116 BOSTON & MAINE 

The discrepancy between the percentage on common stock 
earned and the dividend paid is explained by the fact that the com- 
pany holds 11,282 of its own shares, upon which no dividends were 
paid. This left a small surplus each year. 

Dividend Record. 

In twenty-six years, the full 6% has been paid on the preferred 
stock, and the following on the common : 

% 
1881-5 8 

1886 9% 

1887 10 

1888-9 9 

1890 9y 2 

1891 9 

1892-3 8 

1894-99 6 

1900-6 7 

It will be seen that the stock reached its maximum earning 
power in 1887 when 10% was paid. It then dropped down to 6%, 
increasing to 7% in 1900. Since that time at the same rate to date. 

The Balance Sheet. 

Excluding materials and supplies on hand, the balance sheet for 
June 30th, 1906, showed: Current cash assets, $9,571,535; current 
liabilities, $8,931,260; leaving a working balance of $640,275. 

In addition to the above, there were sundry assets of $1,654,139 
and accrued liabilities, etc., of $5,516,033. The item of cash was 
$2,964,216, and the credit to Profit and Loss was $2,591,590. 

The most considerable item of the current liabilities was notes 
payable of $3,450,000. The report states that this indebtedness was 
for new equipment expenditures in anticipation of the sale of new 
common stock for this purpose. At the date of the report, September 
6th, 1906, $1,850,000 of this indebtedness was discharged, the re- 
mainder to be disposed of as the obligations given therefor mature. 

Investment Value. 

It will be seen from the table of average prices, that the quota- 
tions have considerably declined from the levels of 1901 to 1903. 
Within the six years under view the stock reached its highest quota- 
tion in April, 1902, when it stood at $209 per share. It declined 
from this figure in the slump of 1903-4 to $158, and has not since 



BOSTON & MAINE 117 

been above $185. This has been in the face of a steady increase of 
earnings, of maintenance and of surplus. This may have been due 
in part to the political agitation against the road, but the chief cause 
undoubtedly was the demand for a higher return for the investment. 
At $200 per share the stock yielded only 3^% on its investment. 
With savings bank money at 4% and no large prospects for an in- 
crease of dividends, it was natural that the stock should go to a 
lower level. The fact that it could sell at an average price of $175 
under the prevailing high money rates of 1906 is evidence that there 
has been no loss of confidence in the stock. At this price Boston and 
Maine simply represents a highly conservative and favorite invest- 
ment. The management is known to the people of New England 
and the property is at their very doors. 

There seems little indication now that the dividend rate will be 
increased within the near future. The maintenance charges may 
have seemed to the management adequate, but if the service of the 
road <has failed to satisfy its patrons, it would be very dubious policy 
to increase the dividends in the face of this dissatisfaction. If high 
rates for money should continue, with a larger yield on standard 
stocks, and a larger chance for gain, it seems probable that the pre- 
vailing price of Boston and Maine would tend to decline rather than 
rise. The laws of the states through which it runs being as they are, 
the return to the shareholders is limited to the pure dividend; they 
receive no handsome plums in the way of "rights" and a 40% rise in 
the price of living since 1896 has affected people with fixed incomes 
very deeply. The very natural demand has been for a higher interest 
return. Holders of the stock who let go of it above $175 would 
probably be able to buy it back at a lower figure or to find more 
attractive investments elsewhere. 

The amount of the preferred stock is small. It is limited to 6% 
and its value is fixed simply by the prevailing price of money. On 
a 4% basis it is worth about $150 per share at the outside. 



BUFFALO, ROCHESTER AND PITTSBURGH 

RAILWAY. 

The Buffalo, Rochester and Pittsburgh is one of the few 
small railways operating in trunk line territory. It is essentially 
a "coaler," and its line leads from the bituminous coal regions 
eastward of Pittsburg to Buffalo on Lake Erie, and to Rochester 
on Lake Ontario. It is managed in a solid business way, and with 
the improvement of conditions in the bituminous coal industry, 
its has become exceedingly prosperous. 

History. 

The road represents the consolidation, in 1887, of the Buffalo, 
Rochester and Pittsburgh and the Pittsburgh and State Line com- 
panies. In 1898 the Alleghany and Western was leased, and this 
and minor leases bring the total operated length of road up to 568 
miles. 

The road is located to form a natural highway from Pitts- 
burgh and the coalfields to the lakes, and its chief business is low 
grade freight transportation. It obtains entrance into Buffalo 
and Pittsburgh by traffic arrangements with other roads. 

Ownership. 

The road is controlled by the Iselin interests and others con- 
nected with the Gallatin National Bank of New York. The direc- 
torate includes Adrian Iselin, Jr., identified with coal interests in 
the region; C. O'Donnel Iselin, William E. Iselin, and Ernest 
Iselin; Samuel Woolverton, president of the Gallatin National 
Bank; Henry G. Barbey, Walter G. Oakman, also a director of 
the Long Island, Louisville and Nashville and other roads; W. 
Emlen Roosevelt, also a director in the Nickel Plate and the 
Mobile and Ohio; John L. Riker, a New York capitalist; Oscar 
Grisch, Arthur G. Yates, of Rochester, president; John H. Ho- 
cart, secretary and assistant treasurer, New York. 

The stock does not appear to be very widely held. 

(118) 



BUFFALO, ROCHESTER & PITTSBURGH 119 

As already noted, the company is highly independent, and is 
not especially identified with any of the larger lines. 

Capitalization. 

The capital account on June 30th, 1906, stood as follows: 

Common stock $10,500,000 

Preferred stock 6,000,000 

Total $16,500,000 

Funded debt (net) 15,461,000 

Nominal capital $31,961,000 

Rentals cap. at 4% 12,325,000 

Approximate gross capitalization.. $44,286,000 
Securities held 1,028,855 

_____ 

Approx. net cap $43,257,145 

Approx. net capitalization per mile. . $76,157 

Miles operated 568 

Net earnings on net capital 7.6% 

Stock on net capital 38% 

Fixed charges on total net income. . 53% 

Factor of safety 47% 

The capitalization of $76,000 per mile compares with $131,000 
per mile for the Pittsburgh and Lake Erie, its most direct com- 
petitor, and with $94,000 per mile for the Nickel Plate. 

Its capitalization compared with its net earnings is moderate, 
its 7.6% comparing with 4.2% for the Nickel Plate, and 11.8% 
for the Pittsburgh and Lake Erie. 

The Fixed Charges consume only about one-half of the total 
net income, leaving a wide margin of safety for the securities of 
the company. 

Increase of Capitalization. 

.\s will be seen from the following, the increase of capital- 
ization for the last six years has been small, while the gross 
earnings have increased by 56%. 



120 



BUFFALO, ROCHESTER & PITTSBURGH 



Year 


Common 
Stock 


Preferred 
Stock 6% 


Funded 
Debt 


Total 


Securities 
Held 


Gross 


1899-00 
1905-06 


$6,000,000 
10,500,000 


$6,000,000 
6,000,000 


$12,462,000 
15,461,000 
(net) 


$24,462,000 
31,961,000 


1,028,855 


$4,992,147 
7,829,451 



Net increase over six years : Nominal capital, 30% ; Gross 
earnings, 56%. 

Equities Owned. 

The only considerable holding of the company was the stock 
of the Rochester and Pittsburgh Coal and Iron Company, car- 
ried on the books of the company at $1,003,000. In 1906 the lat- 
ter showed nominal profits of $216,000, of which $120,000 was 
used to pay principal of bonds, and the balance placed to the 
credit of profit and loss. During the year the coal company ex- 
pended $147,000 in improvements, all of which was charged from 
profit and loss account. The operations of the company suffered 
heavily through the strikes in the spring of 1906. The actual income 
to the railway from this source was : 

1902-3. . . / $600,000 

1903-4 320,000 

1904-5 , , 120,000 

1905-6 96,000 

In consequence of the enactment of the new railway law at 
the close of 1906, the stock of the Coal & Iron Company was sold 
to the Mahoning Investment Company, in return for $4,125,000, 
par value, — practically the entire capital stock of the latter. This 
stock was in turn distributed to the shareholders of the preferred 
and the common equally, each shareholder receiving 25% of the 
par value of his stock in stock of the new investment company. 

Character of Traffic. 

Bituminous coal makes up on the average from 65 to 70% 
of the total tonnage of the company, other single items being 
small. The revenue received is relatively low, the average rate 
per ton per mile for 1906 being .50c. This is a considerable in- 
crease from 1899, when the rate had fallen to .41 cent. On the 
other hand, the 1906 rate is a decrease from that of 1901 by .04 
cent. 

It will be seen that the company has profited very materially 
from the "gentleman's agreement" which in 1898 was formed to 
put a stop to the disastrous cutting of rates, 



BUFFALO, ROCHESTER & PITTSBURGH 
Stability of Earnings. 



121 



From the following table it will be seen that the gross earn- 
ings have more than doubled in ten years and that earnings per 
mile have increased about 50%. 



Year 


Miles Operated 


Gross Earnings 


Earnings per Mile 


1896-7 


339 


$3,311,766 


$ 9,767 


1897-8 


336 


3,683,590 


10,963 


1898-9 


338 


3,788,456 


11,208 


1899-0 


405 


4,992,147 


12,326 


1900-1 


472 


5,803,692 


12,353 


1901-2 


472 


6,292,584 


13,375 


1902-3 


472 


7,404,503 


15,462 


1903-4 


499 


7,496,521 


15,090 


1904-5 


. 538 


8,138,274 


15,169 


1905-6 


568 


7,829,451 


13,784 



There was a considerable decline in the coal tonnage in the 
spring quarter of 1906, which with the slight reduction in the 
average rate, brought about a small decrease in the gross earn- 
ings for the year. 

By reason of its traffic, the stability of the road's earnings is 
absolutely dependent upon the conditions of the coal industry. 

Maintenance. 

For the year of 1906 the company spent $1,200 per mile on 
its way and structures, which is very closely the average figure 
for the last six years. It also struck very closely the average figure 
for maintenance of equipment. Together these amounted to 
$3,100 per mile. On the equipment side this would allow about 
$2,000 per locomotive, $800 per passenger car, and $40 per freight 
car. This on a traffic density of 2,200,000 ton-miles per mile of 
road is probably adequate maintenance. 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


1,855,184 
2,150,492 
2,429,596 
2,257,264 
2,483,386 
2,185,450 

2,226,895 


$1,209 
1,132 
1,128 
1,181 
1,256 
1,202 


$1,472 
1,769 
2,094 
2,274 
2,443 
1,935 

$1,998 


$2,681 
2,901 
3,222 
3,455 
3,699 
3,137 


Average, 


$1,184 


$3,182 



122 



BUFFALO, ROCHESTER & PITTSBURGH 





Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




2,368,817 
6,989,301 
2,528,054 


$1,861 

14,888 

2,042 


$3,216 

10,530 

1,966 


$5,077 

25,418 

4,008 


Pitts. & h. Brie 

N.Y.C.&Stily. 



Second Track: 168 miles, equalling 30%. , 

Improvements. 

Through a series of years, the road has set aside annually 

sums for betterment as follows : 

1899-0 $446,977 

1900-1 530,134 

1901-2 583,562 

1902-3 950,749 

1903-4. 497,389 

1904-5 413,516 

1905-6 394,141 

The B., R. & P. shows of course, nothing like the enormous 

expenditures which have been made by the Pittsburgh and Lake 

Erie, but on the other hand it has nothing like the traffic upon the 

latter. 

Surplus Earnings. 

For the last five years the surplus earnings of the company 
have averaged between fourteen and fifteen hundred thousand 
dollars per year, showing the highest figure in the year of 1902-3. 
It should be understood that the items of surplus shown are the 
amounts shown before the special improvement fund has been 
charged off. 







Dividends 


% Earned 


Dividends 


Average 
Price 


Year 


Surplus 


Paid on 


on Common 


Paid on 






Preferred 


Stock 


Common 


1901-2 


$1,273,266 


6 


15.2 


4 


100 


1902-3 


1,781,595 


6 


17.1 


4 


129 


1903-4 


1,513,264 


6 


12.8 


5 l / 2 


140 


1904-5 


1,387,271 


6 


9.8 


6 


139 


1905-6 


1,510,644 


6 


10.9 


6 


152 



Dividend Record. 

It was eight years after the reorganization of the company 
before dividends were paid even on the preferred, and dividends 



BUFFALO, ROCHESTER & PITTSBURGH 123 

on the common were not paid until 1901. The items for the vari- 
ous years were as follows : 

Year. Preferred %. Common %. 

1892 5 

1893 l l / 4 

1897 1 

1898 2 

1899 2 

1900 6 

1901-2 6 4 

1903 6 sy 2 

1904-6 6 6 

The Balance Sheet. 

The balance sheet for 1906 showed : 

Current assets of $1,974,522 

Current liabilities 1,135,507 

Leaving a balance of $839,015 

Of the current assets, $432,000 was in cash. 
The amount to the credit of Profit and Loss at the end of 
the year was $2,325,754. 

Investment Value. 

The dividend on the preferred has been paid for the last six 
years, and the surplus in this period was amply sufficient to 
ensure these payments, which consume only $360,000. A like 
dividend is paid on the common stock. After 6% has been paid 
on the common, the two stocks share alike. 

The preferred sold as low as $140 per share in 1904, recover- 
ing to $164 in 1905. After charging about the usual amount for 
special improvements, the surplus was ample to pay the 6% divi- 
dend on both stocks. 

Yet even under these conditions a quotation of $165 for the 
preferred shares appears rather high. A solid 6% preferred 
stock is hardly entitled to sell over $150 per share without specu- 
lative prospects. The Buffalo and Rochester distinctly has such 
prospects, but on the other hand, with its earnings pivoted, so 
to speak, upon a single industry, it is not a stock without 
risks. 

The 6% payments on the preferred have not amounted to 
more than 25% of the average surplus shown in the past five 



124 BUFFALO, ROCHESTER & PITTSBURGH 

years, and with the reservations noted above, may be regarded as 
a stable dividend. On the other hand, the road has shown 
earnings of not much over 6% on the common, after allowing for 
a reasonable amount of new construction. Unless therefore the 
earnings very considerably increase, it is scarcely likely that the 
dividend will be augmented in the immediate future. 

Six per cent, dividends have now been paid on the common 
for three years, though it is to be recalled that any dividend on 
the common dates back only to 1901. The quotations on the 
common were run up to $150 per share at the beginning of 1903, 
this price being a considerable rise from the price of the high 
year of 1902. In the slump of 1904, it sold off to $118 per share, 
recovering to $160 in the same year. 

It has not touched the latter figure since, and in the general 
decline of March, 1907, it sold as low as $80. But this price was of 
course made after the distribution of the stock derived from the 
transfer of the coal properties. The direct net income from the 
coal company to the railway company was, however, in 1905 and 
1906, very small. 

The stock is not an active one, and is rather closely held. At 
somewhere in the neighborhood of $125 per share it offers slightly 
less than a 5% investment, with fair prospects for additional 
dividends if the prosperity of the bituminous coal industry con- 
tinues and no strikes intervene. If the price could fall to $80 
with business conditions as good as those of 1907, it might read- 
ily do so again, so that somewhere between this price and $125 
it would probably appear to the investor an inviting purchase. 



CANADIAN NORTHERN RAILWAY. 

The Canadian Northern is a new line, designed to parallel 
the Canadian Pacific throughout the greater part of its length 
and of which about 2,500 miles had been completed at the close 
of the fiscal year of 1906. Its construction was obviously stimu-* 
lated by the great financial success of the Canadian Pacific. For 
the present the main line extends from Port Arthur on Lake 
Superior through Winnipeg, to Edmonton in the Canadian 
northwest. The road leases the Northern Pacific & Manitoba 
Railway, which is leased by the Northern Pacific to the pro- 
vincial government of Manitoba and sublet by the latter for 999 
years. The Manitoba government has the option to purchase 
the property for $7,000,000. The road has also a line from 
Toronto northward, including in all about 350 miles, which will 
eventually be extended to the north of Lake Superior, to join the 
main line from Port Arthur. Likewise the Canadian Northern 
acquired control of the Great Northern of Canada, the Chateau- 
gay & Northern Railway and the Quebec, New Brunswick & 
Nova Scotia Railway. These three roads were consolidated in 
1906 under the name of the Canadian Northern & Quebec Rail- 
way Company and afford the road entrance into the cities of 
Ottawa, Montreal and Quebec. The road will be extended west- 
ward to the base of the Rocky Mountains, the design being to 
tap the rich wheat fields of the Canadian northwest, and a line 
is also projected from Eloimami at the northwest corner of 
Manitoba to Fort Churchill on Hudson Bay, suggesting the pos- 
sibility of a short wheat route from the latter point to Europe. 

The enterprise is being financed by Wm. Mackenzie, Sena- 
tor Geo. A. Cox, and the Canadian Bank of Commerce. Wm. 
Mackenzie is president and the Board of Directors in 1906 in- 
cluded D. D. Mann, Vice-President ; Z. A. Lash and Frederic 
Nicholls, all of Toronto, Canada; and R. M. Horne-Payne, of 
London. 

As of June 30th, 1906, the company had outstanding the 
following securities : 

(125) 



126 



CANADIAN NORTHERN 

Capital Stock $30,750,000.00 

Four Per Cent. Perpetual Consolidated 

Debenture Stock 10,901,333.32 

Bonds 24,585,136.70 

Car Trust Obligations 4,180,915.61 



Total Capital $70,417,385.63 

The company had completed at the close of the year 2,482 
miles. Deducting the 351 miles leased from the provincial gov- 
ernment this would leave a little over 2,100 miles, and if this 
were all that were covered by the capitalization tabled above, 
this would represent an issue of securities to the amount of 
around $33,000 per mile. Beyond the $3,630,000 of miscellaneous 
bonds carried on the books at a cost of $1,946,666, the company's 
balance sheet did not show further saleable assets. 

The earnings are as yet small, comparison of mileage and 
earnings for four years showing as follows : 



Year 


Average Miles 
Operated 


Gross Earnings 


Per Mile 


1902-3 


1,236 
1,349 
1,586 
2,064 


$2,449,579 
3,242,703 
4,190,212 
5,903,755 


$1,981 


1903-4 


2,402 


1904-5 


2,641 


1905-6 


2,860 







The traffic density was correspondingly low, but even when 
due consideration has been given to this, it is difficult to under- 
stand the maintenance charges. These for three years compare 
as follows : 



Year 


Traffic Density 


Maintenance 


Total 




Way 


Equipment 

$219 
259 

284 




1903-4 


218,309 
243,275 
259,349 


$353 
351 
391 


$572 


1904-5 


610 


1905-6 


675 







It is difficult to believe that even a new road can be kept up 
at an average charge of $350 per mile or equipment maintained 
at an average charge of $250 per mile, even though net earnings 
be below $3,000 per mile. 

Even with these very light maintenance charges, operating 
expenses in 1906 consumed 66% of the gross earnings. Fixed 
charges, not including taxes, for the year consumed 69% of the 
net earnings, leaving a surplus for the year of $719,574. This 
was equivalent to 2.3% on the outstanding capital stock. 



CANADIAN NORTHERN 127 

The company has a land grant of about two million and 
a half acres, of which a million and one half are available for 
sale. The larger part of the outstanding bonds are guaranteed 
either by the provincial government of Manitoba or by the 
government of Canada. 

The enterprise is not yet sufficiently advanced to consider 
its securities from a solid investment point of view. The last 
few years for the Canadian northwest have been years of un- 
paralleled prosperity, with a tremendous inrush of immigration. 
In the past these huge "booms" have invariably been followed 
by a drastic reaction. It is obvious that such a reaction would 
severely influence the securities of this company if it were to 
take place, as the larger part of its revenues are drawn from these 
newer fields. From this it follows that the securities of the 
company are as yet entirely in the speculative stage and ought 
not to be otherwise considered by the investor. 



CANADIAN PACIFIC RAILWAY. 

The Canadian Pacific shares with the Russian Siberian Rail- 
road the distinction of being the only true transcontinental line, 
in the full sense of the word, in the world. It is the only Ameri- 
can railway operating over more than half the continent. Its 
lines extend from Halifax and St. John on the Atlantic, and from 
Quebec on the Gulf of the St. Lawrence, to Vancouver on the 
Pacific. They reach Toronto and Detroit; through the ownership 
of the "Soo," they reach Minneapolis and St. Paul and extend 
through Minnesota and North Dakota; through the Duluth and 
South Shore they reach Duluth and the rich iron district of north- 
ern Michigan. A net work of lines covering Manitoba, and others 
extending westward, make it the chief forwarding agency in the 
richest wheatfields of the continent. 

In addition to its railways the Canadian Pacific operates a 
fleet of sixty vessels, running from Halifax and Quebec to Liver- 
pool, from Vancouver to Honolulu, China and Japan, and cross- 
ing the Great Lakes as well. Besides these properties the road 
possesses farm land of an estimated value of from sixty to a hun- 
dred million dollars. 

A large part of the road was built from the subsidy and funds 
received from the lavish land grants of the Canadian government ; 
its capitalization is still low, and its financial condition is excel- 
lent. It stands second only to the Pennsylvania in the number of 
its shareholders. 

History. 

The Canadian Pacific was chartered in 1881 and its main 
line opened throughout six years later. The subsidy of the 
Dominion government amounted to $25,000,000, and "habitable 
land" from which the road has already derived twice this sum. 
Originally a single track of iron from Montreal to the Pacific, by 
purchase and new construction it has steadily added to its line 
until in 1906 it included 8,777 miles in its returns; it operated 
separately 438 miles more, and had 923 miles under construction. 

(128) 



CANADIAN PACIFIC 129 

This gives a. total of 10,138 miles; and if we add the mileage of 
the Minneapolis, St. Paul and Saulte Ste. Marie (2,153 miles) and 
the Duluth and South Shore (593 miles), the total amounts to 
12,833 miles. 

Ownership. 

The line was built by a group of Canadian capitalists, of 
whom Donald Alexander Smith (now Lord Strathcona), Sir Wil- 
liam C. Van Home, Richard B. Angus, and Sir George A. Drum- 
mond were the leading spirits, and it is still under their active 
control. 

The directorate of 1906 included Sir William C. Van Home, 
chairman, Lord Strathcona, Richard B. Angus, Edmund B. Os- 
ier, M. P., Sir Sandford Fleming, Wilmot B. Matthews, Charles 
R. Hosmer, Sir George Drummond, Senator Robert Mackay, R. 
G. Reid, Senator L. G. Forget, and President Sir Thomas S.haugh- 
nessy, all of Canada ; Thomas Skinner of London, and Clarence 
H. Mackay, President of the Postal Telegraph Cable Company, 
New York. 

The executive committee included Sir William Van Home, 
Lord Strathcona, Mr. Angus, Mr. Osier and President Shaugh- 
nessy. 

Aside from the land grant funds, the road was built largely 
with British money and the bulk of its securities are held by English 
investors. It is stated that the company has over 30,000 share- 
holders, which compares with 44,000 for the Pennsylvania, the 
largest number in any road in the United States. 

Capitalization. 

On June 30, 1906, the capital account stood as follows: 

Common stock $101,400,000 

Preferred stock 42,719,999 

Total $144,119,999 

Bonds outstanding 41,738,086 

Debenture stock, a 101,519,411 

Nominal capital $287,377,496 

Rentals capit. at 4% 16,250,000 



130 CANADIAN PACIFIC 

Approx. gross capital $303,627,496 

Securities held 52,492,909 

Approximate net capital $251,134,587 

Approx. net capitalization per mile. $28,613 

Miles operated 8,777 

Net earnings on net capital 9.4% 

Stock on net capital 57% 

Fixed Charges on total net income 33% 

Factor of Safety 67% 

Inasmuch as a considerable part of the road lies in eastern 
Canada, its capitalization of $28,613 per mile is exceptionally low. 
This figure compares with $59,512 for the Northern Pacific; $42,362 
for the Great Northern, and with $96,400 for the Grand Trunk 
Railway, its chief competitors. Moreover, the net earnings on the 
estimated net capitalization show a high percentage, its 9.4% com- 
paring with 9.6% for the Northern Pacific, and 10.1% for the Great 
Northern. 

Equities Owned. 

On June 30th, 1906, the company held other securities of a par 
value of $97,000,000, of which the following were the chief items : 
Duluth, South Shore & Atlantic, consolidated mortgage. $15, 107,000 
do. income certificates .... 3,000,000 

do. preferred stock 5,100,000 

do. common stock 6,100,000 

Minneapolis, St. Paul & Sault Ste Marie preferred stock 3,533,400 

do. common stock 7,066,600 

do. consolidated mtge bonds 3,933,000 

Manitoba and Northwestern, common 5,612,000 

Atlantic and Northwestern, guaranteed stock 3,240,000 

Columbia and Western, first mortgage bonds 5,691,000 

The total of these securities is carried on the books at a cost 
of $52,472,909. 

The earnings of the "Soo" line are high, the stock netting 7% 
on the preferred, 4% on the common, and the undistributed surplus 
amounting to about as much more. 

The Duluth and South Shore is operated at a loss, and the 
company's other equities, save in its lands, are of no considerable 
value, as compared with the magnitude of the company. 



CANADIAN PACIFIC 131 

Land Grants. 

The Canadian Pacific and its subsidiary lines received a total 
of 30,000,000 acres, or if the 2,500,000 acres which the company is 
to receive through the Columbia and Western Railroad be included, 
over 33,000,000 acres. From this it has sold off 10,500,000 acres, 
and turned back to the Dominion government nearly seven million 
acres, deriving from this source a total of over fifty million dollars 
to date. 

Of this, $36,000,000 has been charged to construction and equip- 
ment, and deducted from the cost of the railway property, leaving 
a credit balance included in the company's assets of $14,500,000. 
The year of 1905-6 was one of extraordinary prosperity for the 
Canadian northwest, and was reflected in heavily increased land sales 
by the road, the proceeds for the year amounting to $6,900,000. 

During the year the Canadian Pacific paid the Dominion gov- 
ernment $6,500,000 on its land grant bonds, leaving then only $1,- 
500,000 of these bonds outstanding. These bonds lie against some 
13,400,000 acres of company lands which are otherwise clear. The 
average amount realized from the sale of a million acres during the 
year was a little under $6 per acre. Prospective town sites included, 
the remaining lands can scarcely be worth very much less, certainly 
not if the deferred payments on land and town site sales outstanding, 
amounting to $16,383,000, be included. 

If the 2,500,000 acres yet to be received be included, the total 
reaches nearly to 16,000,000 acres, which, at no more than three 
dollars an acre, amounts to $48,000,00 ; and this, with the $16,000,000 
outstanding, would make up total land assets of $64,000,000. 

The Canadian Pacific's land holdings even at a low valuation, 
can scarcely be worth less than this, and should the Canadian north- 
west meet with no such drastic years of adversity as came in the 
nineties, they would eventually be worth much more, perhaps much 
in excess of $100,000,000. 

Were this amount, or half of it, deducted from the capitaliza- 
tion, it would bring the average per mile to an amount far below that 
of any other great trunk line. 

Style of Capitalization. 

The makeup of the capital account differs very considerably 
from the customary style of American roads. With the completion 
of payments on the new issues, the common stock will amount to 
$121,680,000. This, with the preference stock outstanding, makes 



132 



CANADIAN PACIFIC 



up a total of $164,400,000 of stock, or over 60% of the estimated net 
capitalization, leaving only 40% for the funded debt. This is a 
strong position for any company to be in. 

The position of the Canadian Pacific is even more favorable 
than this. The amount of the first mortgage bonds is relatively small, 
only $40,000,000 out of an estimated capitalization of more than a 
quarter of a billion. The balance of the funded debt is in the form 
of 4% debenture stock. This amounted on June 30th, 1906, to 
$101,000,000, against which securities were held to book value of 
$52,000,000. This debenture stock is perpetual, and the interest is 
cumulative, and in the default of the interest the stockholders may 
sue and obtain judgment against the company; but the stock carries 
no mortgage, and is not like a mortgage, foreclosable. 

The Fixed Charges for 1905-6, including rentals and the inter- 
est on the debentures, consumed only 33% of the total net income 
shown, leaving a Factor of Safety of 67%. But, as indicated above, 
this factor is in reality stronger than it looks. 

The present amount of 4% preferred stock consumes only 7% 
more of the net income, so that the Factor of Safety on the pre- 
ferred is 60%, making it a very strong preferred stock. 

Increase of Capitalization. 

Despite enormous outlays, mainly for new construction, the in- 
crease in the capitalization in the last five years has been much 
less than it might have been anticipated, and very much less than 
the corresponding increase in gross earnings. The following are 
the items : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1900-1 
1905-6 


$65,000,000 
101,400,000 


$31,171,000 
42,719,999 


$125,438,161 
143,257,497 


$221,609,161 
287,377,496 


$30,855,203 
61,669,758 



Net increase over five years: Nominal capital, 30%. Gross 
earnings, 100%. 

The increase for the year of 1901 amounted to $34,000,000 of 
stock and debentures, this being offset by a reduction of $13,500,000 
in the funded debt, the net increase for the year amounting to 
$21,500,000. 

The increase for the year 1906-7 includes $20,280,000 of com- 
mon stock, almost all sold before June 30th, 1906, and on which 
more than 25% had been paid in; and in January, 1907, $7,500,000 
preferred stock was sold in London. The issue of the preferred 



CANADIAN PACIFIC 



133 



stock is limited to one-half the amount of the common stock out- 
standing. 

In 1906 the Minneapolis, St. Paul and Sault Ste. Marie Railway 
issued an additional $5,820,000 consolidated mortgage bonds for the 
construction of 291 additional miles of road, the interest on which 
is guaranteed by the Canadian Pacific. 

Character of Traffic. 

The Canadian Pacific does not reduce its items of freight traffic 
to tons. The main features for 1906 were as follows : 

Grain, 2,000,000 bushels, 

Lumber, 1,804,000,000 feet, 

Flour, 5,994,000 barrels, 

Livestock 1,428,000 heads, 

Manufactured articles, 3,818,000 tons, 

Other articles, 4,098,000 tons. 

In a broad sort of way the Canadian Pacific is mainly a grain 
carrier, and its prosperity is absolutely bound up with that of the 
wheat fields of the Canadian northwest. This is its principal source 
of revenue. 

Freight traffic receipts made up two-thirds of the gross; pas- 
senger a little over 25%. 

The earnings of the steamship lines are not separately tabulated, 
but these items together with the revenue from sleeping cars, express 
elevators, telegraph and miscellaneous, made up 10% of the gross. 

Stability of Traffic. 

While the mileage of the Canadian Pacific has increased one- 
third in ten years, the gross earnings have been multiplied three 
times. The earnings per mile have been more than doubled, as the 
table reveals : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1892 

1894 


6015 
6360 
6476 
6567 
6681 
7000 
7563 
7588 
7748 
8133 
8568 
8777 


$21,409,352 
18,752,167 
20,681,597 
24,049,535 
26,138,977 
29,230,038 
30,855,203 
37,503,053 
43,957,373 
46,469,132 
50,481,882 
61,669,758 


$3541 
2901 


1896 


3191 


1897 

1898 


3662 
3912 


1899.. 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


4175 
4079 
4942 
5673 
5714 
5892 
7026 



134 



CANADIAN PACIFIC 



It is to be noted that the figure for 1905-6 shows an extra- 
ordinary increase, which was due in part to the very open winter 
and in part to the enormous immigration into the Northwest Ter- 
ritory. This exceptional advance can hardly be sustained 
through any period of years. It is not improbable that with the 
decline of the "boom," this figure will show a decrease. 

Maintenance. 

It has often been noted that the great surplus recently shown 
by the Canadian Pacific has been made up on a basis of mainte- 
nance charges, which are considerably lower than that of most 
American roads. President Shaughnessy stated in his report for 
1906 that "it is the policy to replace at the cost of working ex- 
penses, all rolling stock that becomes obsolete or destroyed, car 
for car, locomotive for locomotive, without reference to the 
increased capacity and cost of more modern standard equipment. 
As a consequence, every car and locomotive shown in the inven- 
tory of rolling stock is either in service, or is provided for in the 
equipment replacement fund." 

The charges for way and equipment have not been itemized 
according to the American custom, save from 1904 ; the averages 
for the three preceding years have been compiled from Moody's 
Manual. It will be seen that, on this showing, while Traffic 
Density has doubled in the six years, the average maintenance 
charges were considerably higher in the first three years than in 
the latter three. The items compare as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 

$979 
1,219 
1,481 

722 
772 
839 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


315,170 
428,034 
487,284 
451,311 
472,432 
597,306 

458,589 


$554 
742 
867 
907 
995 

1,037 

$850 


$1,533 
1,961 
2,348 
1,629 
1,767 
1,876 


Average 


$1,002 


$1,852 






Traffic Density 


Maintenan( 


:e per Mile 


Total 




Way 


Equipment 

$594 
791 
1,049 
1,113 
1,246 


Great Northern 
Union Pacific... 


650,321 
729,102 
739,206 
577,005 
594,898 


$960 
1,300 
1,173 
1,123 
1,446 


$1,554 
2,091 
2,222 
2,226 




2,692 



CANADIAN PACIFIC 



135 



It will be seen that the average of the Canadian Pacific's charges 
compares favorably with its competitors, the Great Northern and the 
Northern Pacific; though both the Hill lines are much below their 
southerly rivals in this regard. 

The comparison of the various roads for the single year of 
1906, stands as follows: 



Roads 


Traffic Density 


Way 


Equipment 


Total 


Atchison 


678,554 
693,879 
990,815 
971,334 
835,342 
597,306 


$1,775 
1,479 
1,519 
1,387 
1,092 
1,037 


$1,554 

1,271 

1,222 

1,098 

816 

839 


$3,329 
2,750 
2,741 
2,485 
1,908 
1,876 


Union Pacific 


Northern Pacific 



The traffic density of the Canadian Pacific is the lowest on the 
list. These items compared there is, for example, between the 
Canadian Pacific and the Atchison, a difference of at least $500 per 
mile of maintenance charges. An Atchison standard on the Canadian 
Pacific's 9,000 miles of road would have cut its surplus down by 
$4,500,000, or more than 25%. 

Moreover, while the Canadian Pacific does not differ very 
greatly from the practice of the Great Northern, under the effective 
management of James J. Hill, it should be remembered that most 
American roads charge off large sums annually from earnings for 
improvements. 

Improvements. 

During the year of 1906 expenditures for improvements and 
additions on the Canadian Pacific amounted to $7,783,000 on the 
company's own lines, and $757,580 on leased lines. But of this 
account it appears that only $2,535,000 came from the surplus in- 
come. The balance apparently was supplied by the sale of securities. 

No statement of any such appropriation from surplus appears 
in the report for 1905-6. It may be inferred, therefore, that no large 
sums have been especially set aside after the fashion of American 
railroads. The company follows the more English custom of making 
improvements from capital additions. 

Surplus Earnings. 

In six years the surplus available for dividends has risen from 
five and a half to sixteen and a half million dollars. The dividends 



136 



CANADIAN PACIFIC 



on the preferred stock are limited to 4%. Thus it was that the 
percentage of surplus shown on common stock has more than 
doubled in the same period, despite a considerable increase of capital. 
If, however, the percentages shown are to be compared for the pur- 
pose of investment with the corresponding percentages for American 
roads, this nominal surplus should be considerably decreased. An 
addition of $500 per mile to the maintenance charges would hardly 
more than bring the Canadian Pacific up to the level of other Pacific 
roads, outside of the Great Northern, and this amount would reduce 
the surplus shown by over $4,000,000. This, however, would still 
leave a balance of between ten and eleven per cent, on the common 
stock for the year, thus leaving an ample margin for the payment of 
the 7% dividend. Comparisons for six years are as follows : 







Dividends 


Per cent. 


Dividends 


Average 
Price 


Year 


Surplus 


on Preferred 


Barned on 


on Common 






Stock 


Com. Stock 


Stock 


1900-1 


$5,586,965 


4% 


6.6% 


5% 


92 


1901-2 


7,559,914 


4 


9.7 


5 


116 


1902-3 


10,071,461 


4 


10.3 


sy 2 


125 


1903-4 


8,318,277 


4 


8.2 


6 


121 


1904-5 


9,105,686 


4 


7.5 


6 


121 


1905-6 


16,592,215 


4 


14.8 


6 


166 



Dividend Record. 



The Canadian Pacific has an enviable record among Pacific 
roads for the steadiness of its dividends. It has paid the 4% on the 
preferred stock without interruption from the beginning in 1894. It 
began the payment of dividends on the common in the second year 
of its existence as an incorporated road, and has continued them with 
the omission of but a single year since. In 1906 the stock was placed 
on a 7% basis. 



Year. 

1883 

1884 

1885 

1886-9 .... 
1890-3 .... 

1894 

1895 

1896-7 2y 2 



Dividends. 

. 2y 2 % 

. 5 

. 4 

. 3 

. 5 

. 5 



Year. 

1898 

1899 

1900 

1901-2 5 

1903 $y 2 

1904-6 6 

1906-7 7 



Dividends. 

... Ay 2 

,.. 4 
5^ 



CANADIAN PACIFIC 137 

The Balance Sheet. 

As of June 30th, 1906, the balance sheet, excluding materials 
and supplies on hand, showed : 

Current Assets $23,087,544 

Current Liabilities 11,323,924 



Leaving a working balance of. . .$11,763,620 
In addition to the above, there were deferred payments on land 
and town site sales amounting to $16,382,823, which, while not a 
quick asset, might have been so included. This amount would have 
brought the company's working capital up to $28,146,443. 

The item of cash was $17,752,415, and the balance to credit of 
surplus income, corresponding to profit and loss account of other 
roads, was at the close of the year $25,741,414, from which the 
dividends for the year — $3,896,400 — were to be deducted. 

Investment Value. 

The Canadian Pacific has hitherto enjoyed a practical monopoly 
of all of western Canada. This monopoly is being abruptly broken 
by the simultaneous invasion of the Great Northern and the Can- 
adian Northern, and the projected line of the Grand Trunk Pacific. 
The latter will parallel the Canadian Pacific, running to the north, 
practically from end to end. The Canadian Northern has already 
reached into the wheat fields of the Northwest, and the president of 
the Great Northern has announced plans for a new line from Win- 
nipeg to the Pacific, with numerous branch lines connecting with the 
main system. In brief, these rich wheat fields are witnessing a 
greater amount of railroad construction than has been seen on this 
continent for more than fifteen years. It is estimated at 5,000 miles. 

At the present time the Canadian Pacific's average freight rate 
per ton mile is relatively high, though not as compared with other 
Pacific roads. Its average rate of .74 cents for 1906 was rather lower 
even than the Great Northern's, which is the lowest among the 
trans-continentals of the United States. This is an average of 25% 
higher than the general freight rates of eastern North America. 
The freight rates on the eastern portion of the Canadian Pacific are 
considerably below the average, which means that the rates in the 
Far West are above it. It is scarcely probable that with vigorous 
competition these rates can be maintained. For a year or two, with 
the continuance of the present extraordinary prosperity, the dim- 



138 CANADIAN PACIFIC 

inution may be slight, but when the inevitable reaction comes, the 
reduction will probably be considerable. 

The meaning of this is very simply that while the Canadian 
Pacific's traffic density and gross tonnage may increase heavily, 
gross earnings will increase in lesser ratio, and net earnings still 
less. 

The road is in excellent condition to meet this competition; 
its estimated capitalization is low, the percentage of net earnings on 
this estimated capitalization is high, the company has a large sur- 
plus, and the increasing income from its land sales places it in a 
position of great solidity. It has few weak points. It is established 
within a rich territory, and its steamship lines at either end of the 
road enable it to command through traffic. 

Nevertheless this competition must be met, and this question 
must very deeply affect the investment value of its stock. The years 
that follow wild booms are proverbially drastic years for railways, 
and it would be exceptional conditions which would enable the road 
to show such a relative surplus, through the next five or six years, 
that it showed in 1905-6. In a word, the company's securities repre- 
sent rather speculative issues and the investor who takes the risk 
which is involved is entitled to a higher return upon his money than 
would be the case if its territory were one where traffic conditions 
were relatively fixed. 

The surplus shown for 1905-6 was altogether exceptional, repre- 
senting as it did, a year of abnormal increase in gross earnings 
(more than 20%), together with an abnormal winter, conducive to 
very low operating charges. 

For the year before, very far from an unprosperous year, the 
percentage shown on the common stock was a little more than half 
that shown in 1906. Interest will be paid in 1906-7 on twenty mil- 
lions more of common stock, so that $1,400,000 must be added to 
dividend charges, and the increase of one per cent, in the dividend 
adds nearly as much more, or $2,600,000 in all. 

This can be paid without a strain under present conditions. 
Should the Northwest meet with no heavy setback, it is not im- 
probable that the stock can be maintained on a 7% basis. At this 
rate a quotation of 150 to 175 would scarcely be regarded as ex- 
cessive, especially in view of the fact that the company's policy to- 
wards its stockholders has been extremely liberal in the matter of 
rights, and that the profits from this source have considerably in- 
creased the actual dividends paid for several years. 



CANADIAN PACIFIC 139 

But beyond its immediate earnings, the company has an un- 
divided equity, practically clear of any burdens, equal in value to at 
least the half of the common stock. This is not a "quick asset." It 
is improbable that the lands could be sold outright now for such 
a sum as this, nor could they be leased like the Great Northern's ore 
lands. But, after the small amount of Land Grant bonds has been 
paid off, as it will be this year, land sales will become a legitimate 
source of annual revenue. Supposing the land sales through the 
next ten years average 600,000 acres annually at an average of $6 
an acre, this would add $3,600,000 to the company's income, repre- 
senting about 2y 2 % on the common stock. The New York Cen- 
tral's equities in its subsidiary roads are very much larger than this, 
and in fixing the price of the stock these equities may be taken to 
represent the equivalent of a one per cent, annual dividend on the 
stock. 

On a similar basis of estimate, the Canadian Pacific, common, 
may be looked upon as a seven per cent, stock, with rather large 
speculative possibilities. If the company's policy regarding rights 
be continued, the stock should yield to its possessor from eight to 
ten per cent, per annum on the par value, with the possibility that a 
portion of the land equity may be distributed in the form of a stock 
dividend. In view, however, of possibilities of keen competition and 
the burden of added dividends it would involve, such a stock divi- 
dend would be regarded in conservative circles as of dubious policy. 
Moreover, it should be remembered that Canadian Pacific stock is 
speculative in more senses than one and that a succession of bad 
harvests might very seriously cripple the road. The company is 
as susceptible in this regard as any of its transcontinental rivals. 

In 1906 Canadian Pacific sold up to 202. This was considerably 
in advance of the price of 145 shown in the prosperous year of 1902, 
and was a rise from a low level of 109 at the beginning of 1904. 
On a 7% basis, at 175, the Canadian Pacific common is a 4% stock, 
with the possibility of an increase in dividends and likewise ad- 
ditional income from rights. At around this figure the stock would 
be an attractive purchase to speculative investors. At much beyond 
this figure, it is a pure speculation, based upon the possibility of a 
stock distribution. If such a distribution were in prospect, the stock 
might readily sell higher than it has, but cautious investors who are 
not gambling in possibilities, would probably be able to repurchase 
their holdings eventually, did they sell them, at considerably below 
the high levels of 1906. It is not improbable that the high figure 
reached at the close of 1906 may represent the high point for some 
time to come. In March, 1907, the stock sold down to $155. 



CENTRAL OF GEORGIA RAILWAY. 

The Central of Georgia operates a network of railroads ex- 
tending westward from Savannah to Chattanooga, to Birming- 
ham, to Montgomery, etc., and owns a line of ocean steamships. 
It is not directly a part of the Southern Railway system, but its 
stock is supposed to be held by Southern interests, and its asso- 
ciation with the latter is close. 

The Central Railroad, which was the nucleus of this system, 
is one of the oldest railways in the U. S., having been begun in 
1835, and completed in 1843. It was merged with the Macon and 
Western, which was begun in 1833. It had built up by amalga- 
mation and otherwise a highly prosperous company, paying 
heavy dividends, when in 1888 the Richmond Terminal-Jay 
Gould interests obtained control of the road, and it was leased 
to a subsidiary of the Richmond Terminal system. Immediately 
there was the usual expansion of debt, under one pretext and an- 
other, and in 1892 receivers were appointed. A long and costly 
litigation ensued, and in 1895 the old Central Railroad and Bank- 
ing Company of Georgia was succeeded by the present organiza- 
tion, which also included the Savannah and Atlantic, the Macon 
and Northern, the Savannah and Western, the Montgomery and 
Eufaula, and the Lowell and Gerard Railways. Several smaller 
lines have been added since. It leases the Augusta and Savannah, 
the Southwestern Railway, and the Chattanooga and Gulf, and oper- 
ates a total of 1,878 miles of road. 

The directorate of the road includes : Charles Steele, of J. P. 
Morgan and Company; James A. Blair, of Blair and Company, 
New York, chairman of the Seaboard Air Line ; George G. 
Haven, of New York, a member of the executive committee of the 
Atchison, also a director in the Morton Trust Company, the 
Mutual Life Insurance Company of New York, etc. ; John F. 
Hanson, Macon Ga., president; Alexander R. Lawton, Savan- 
nah, Ga., vice-president; W. A. Winburn, Savannah, Ga., second 
vice-president; W. C. Bradley, Columbus, Ga. ; J. W. English, 

(140) 



CENTRAL OF GEORGIA 141 

Atlanta ; Uriah B. Harrold, Americus, Ga. ; Joseph Hull, Savan- 
nah ; Samuel R. Jaques, Macon ; C. B. McCormack, Birmingham, 
Ala. ; George J. Mills, Savannah ; J. G. Oglesby, Atlanta. 

Capitalization. 

On June 30th, 1906, the capital account of the road stood as 
follows : 

Common stock $5,000,000 

Funded debt 35,033,000 

1st Income bonds 4,000,000 

2nd " " 7,000,000 

3rd " " 4,000,000 

Equipment Trusts 2,429,764 

Total capital $57,462,764 

Rentals capitalized at 4% 8,804,025 

Approx. gross capitalization. $66,266,789 
Securities held 6,600,585 

Approx. net capitalization . . . $59,666,204 

Approx. net capital per mile $31,771 

Average miles operated 1,878 

Net earnings on net capital 5.8% 

Stock and Incomes on net cap 35% 

Fixed Charges on total net income. . 57% 

Factor of Safety 43% 

Rentals paid, less the rentals received, amounted to $352,161 
in 1906, which capitalized on the usual basis of 4%, gives the figure 
noted above. Securities held, including those pledged under vari- 
ous mortgages, amount to $6,600,585, but the company's income from 
its investments in 1906 was only $150,252, which is less than 2^% 
on the book value of the properties. A considerable part of the 
securities, however, was the $2,000,000 of the capital stock of the 
Ocean Steamship Company which, in 1906, paid no dividends. 

The approximate net capitalization per mile is low, comparing 
with $49,223 per mile for the Southern Railway, $47,453 for the 
Seaboard Air Line, and $39,684 for the Louisville and Nashville. 

In consequence of its comparatively low capitalization, the net 
earnings in 1906 showed 5.8% on the net capitalization, as against 



142 CENTRAL OF GEORGIA 

4.2% for the Southern Railway, 3.7% for the Seaboard, and 8.9% 
for the Louisville and Nashville. 

Of the net capitalization, $15,000,000 is in the form of income 
bonds whose charges are non-cumulative, and on which interest is 
paid only when earned. These income bonds are a lien in the order 
of their priority, on the Savannah and Western, the Columbus and 
Rome, and on the Savannah and Atlantic railways ; also a third lien 
on the main line, and a second lien on all securities and equities ac- 
quired by the Central of Georgia. Aside from this security they are 
a kind of preferred stock and combining these with the small amount 
of capital stock, the amount of securities on which dividends are 
optional represents 35% of the net capitalization. 

In 1906 the Fixed Charges consumed 57% of the total net in- 
come, which, however, did not include any receipts from the Ocean 
Steamship Company. This left a nominal iactor of safety of 
about 43%. 

Equities Owned. 

Of the securities owned, the largest single item was the $2,- 
000,000 par value of the stock of the Ocean Steamship Company, of 
Savannah. The earnings of this company are not reported. 

The road also owns $1,500,000 par value of the Western Rail- 
way of Alabama stock, and $1,589,000 of the income bonds of the 
Charleston and Western Carolina Railway. 

Increase of Capitalization. 

The additions to the capital of the road within six years from 
1900 have been very slight, the amount of common stock and in- 
come bonds remaining fixed, and the funded debt having increased 
by about 25%. The total increase of the nominal capital was 12%, 
as against an increase in gross earnings of 87%. This is a handr 
some showing. 

Character of Traffic. 

In 1906 farm products contributed 20% of the gross tonnage of 
the road, one-quarter of this being cotton; bituminous coal con- 
tributed 14%, and lumber 23%, the balance being widely distributed. 

Passenger earnings were comparatively high, contributing 25% 
of the gross. 

Stability of Earnings. 

The increase of the traffic of the road within ten years has been 
very striking. From the first full year of the reorganized company, 
the increase of mileage and earnings have been as follows : 



CENTRAL OF GEORGIA 
Earnings. 



143 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896-7 


1,491 


$5,280,696 


13,540 


1897-8 


1,523 


5,507,070 


3,614 


1898-9 


1,523 


5,767,345 


3,785 


1899-0 


1,539 


6,086,263 


3,954 


1900-1 


1,678 


6,920,715 


4,124 


1901-2 


1,845 


7,750,691 


4,201 


1902-3 


1,845 


9,164,471 


4,968 


1903-4 


1,865 


9,396,931 


5,039 


1904-5 


1,878 


10,135,055 


5,397 


1905-6 


1,878 


11,396,123 


6,068 



It will be seen that from the first year the mileage earnings have 
increased by more than half. This advance was very steady and 
subject to no setbacks throughout the period. 

Maintenance. 

For a period of six years the traffic density and maintenance 
charges show as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 

1495 
554 
767 
675 
929 
911 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


260,468 
255,548 
313,041 
300,097 
316,979 
373,339 

303,245 


$740 

780 

1,007 

978 
856 
982 


$1,235 
1,334 
1,774 
1,653 
1,785 
1,893 


Average 


$890 


$722 


$1,612 






Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 


Southern 

Seaboard 


435,987 
311,366 
259,769 
929,594 


$860 
620 
709 

1,490 


$964 
611 

556 
1,537 


$1,824 
1,221 
1,265 
3,027 


Atlantic Coast.. 
L/Ouis. & Wash. 



It will be seen that the average traffic density is one-third less 
than that of the Southern Railway, but the average maintenance 
charges per mile have been only $212 less than the Southern, while 
on a smaller traffic density (but higher mileage earnings), than 
the Seaboard, its maintenance charges have averaged nearly $400 
per mile more. 



144 



CENTRAL OF GEORGIA 



The appropriations apparently have been very liberal, and cer- 
tainly seem adequate. These amounts include, however, the amounts 
appropriated from income to improvements. 

Surplus Earnings. 

On the basis of this very steady increase in business the sur- 
plus has risen from $200,000 in 1901 to $1,250,000 in 1906. The 
increase for the latter year was especially notable, amounting to a 
clear jump of 50%, while in turn that of 1905 was more than 
double the surplus of 1904. That is to say the earnings for 1905 
and 1906 were exceptional. 



Year 


Surplus 


Amount paid 
on 1st In- 
come Bonds 


Amount paid 
on 2nd In- 
come Bonds 


% Earned 
on 2nd In- 
come Bonds 


Av. Price of 

2nd Income 

Bonds 


1900-1 


$201,352 
122,940 
203,508 
338,467 
854,517 

1,250,671 


5 
3 

5 
5 
5 
5 




.019 
.042 
.05 

1.97 

9.3 
15. 


28 


1901-2 




38 


1902-3 




31 


1903-4 
1904-5 
1905-6 


2 
5 

5 


51 

77 
86 



Dividend Record. 

No dividends have ever been paid on the stock. The following 
rates of interest have been paid on the income bonds since the 
organization of the new company: 



Year 


1st Income 


2nd Income 


3rd Income 


Common 


1896 


1# 

2% 
2 

2 

5 
3 
5 
5 
5 
5 








1897 








1898 








1899 








1900 








1901 








1902 








1903 








1904 


2 
5 
5 






1905 


5 
5 




1906 









The Balance Sheet. 

As of June 30th, 1906, the balance sheet showed : 

Current assets of $2,500,605 

Current liabilities of 1,152,801 



CENTRAL OF GEORGIA 145 

In addition to the latter there were interest and rentals, etc., 
accrued of $558,725, making a total of $1,711,526 liabilities, and 
leaving a working balance of $789,079. 

The item of cash was $1,216,489, and the balance to the 
credit of Profit and Loss at the end of the year was $647,866. 

Investment Value. 

The stock of the company is very closely held and seldom 
dealt in. The principal interest of the public is in the bonds and 
in the $15,000,000 incomes. 

The full 5% to which all the incomes are entitled was 
earned and paid in the years 1905 and 1906. The full divi- 
dends on the $4,000,000 of first preference incomes were paid for 
four years to 1906, and in that time the bonds ranged in price 
from $61 in 1903 to $101 in 1905, touching a low point of $84 in 
1906. The full dividend was paid on the second preference bonds 
in 1905 and 1906, and in these two years the price ranged from 
$57 to $91 per share. The interest on the third preference in- 
comes was not paid previous to 1905, when the full 5% was de- 
clared. It will be seen from the table of surplus earnings that 
in 1906 the amount, after paying the full 5% on all these income 
bonds, was $500,000, or more than 50% over the total amount re- 
quired for the interest charges. 

This left about 10% as nominally earned on the $5,000,000 
of common stock. It is evident that the road is in competent 
hands, that it is being well maintained, and that its business is 
increasing rapidly. Its association with the Southern Railway 
assures it comparative freedom from destructive competition, 
and at the same time the award of all the business which the 
Southern can turn to it. There seems no reason therefore, un- 
less a very severe setback should come, why the road should 
not earn the full charges on its income bonds and something 
over. Georgia, it is true, is still more or less a one-crop state, 
but its lumber interests have been advancing rapidly, and the 
lumber traffic furnishes one-fourth of the gross tonnage of the 
Central. Likewise the report for 1906 notes that "over two mil- 
lion fruit trees were coming into bearing during the year, and in 
1906 likewise 194 new industries, with a capital of six and a half 
million dollars, and employing seven thousand hands were estab- 
lished along the line of the company." In other words, it is ap- 
parent that in 1906 Georgia was enjoying the high prosperity of 

10 



146 CENTRAL OE GEORGIA 

the country in general, and while a comparative failure of the 
cotton crop might bring a sharp drop in the Central's securities, 
there seems no reason now to suppose that the road should suf- 
fer another such entanglement as came to it in 1888. 



CENTRAL RAILROAD OF NEW JERSEY. 

The Jersey Central, as it is familiarly known, is in reality simply 
the eastern division and the New York terminal of the Reading 
system. The majority of its capital stock is owned by the Reading, 
its directing head is the same, and the road is operated in so close 
association with the parent company as to make it to all intents a part 
of the larger road. The Central of New Jersey by itself, however, 
would be a notable road, as one of the great anthracite "coalers," 
and as holding, through a subsidiary company, vast quantities of 
anthracite coal. 

History. 

The fortunes of the road, like the Reading itself, have been 
checkered with receiverships and foreclosures, and indeed the history 
of the two companies has been one of close association for a quarter 
of a century and more. 

The road suffered severely from the depression that followed 
1873, and in 1877 passed into the hands of a receiver. In 1883 it 
was leased for ninety-nine years to the old Philadelphia and Reading, 
on a basis of 6% for its stock and the interest on its bonds. The 
Reading itself was unable to keep on its feet, and both roads passed 
into receivers' hands again. The lease was surrendered, and in 1887 
a reorganization of the Central was effected. The reorganized 
company has survived from this date. In 1892, as part of the am- 
bitious dreams of the McLeod management, the road was again 
leased to the Reading, through the subsidiary Port Reading Com- 
pany, but this lease did not survive the year, and since that time the 
road has been continuously operated as a separate company. 

In 1901, with the accession of the Baer regime in the Reading, 
a controlling interest, $14,504,000 out of a total of $27,131,800 par 
value of Central of New Jersey stock outstanding, was purchased by 
the Reading, and George F. Baer was made president. 

(147) 



148 CENTRAL RAILROAD OF NEW JERSEY 

The road operates 610 miles of railway, the most important part 
of which extends from Jersey City through eastern Pennsylvania to 
Scranton in the anthracite coal regions. Another important division 
extends southward centrally through New Jersey to a double ter- 
minal on Delaware Bay. About one-half of the road is double track. 

Ownership. 

As the Reading owns a clear control of the road, the director- 
ate is made up in the Reading interest, four of the nine directors 
being also directors of the Reading, including George F. Baer, 
president ; H. McK. Twombly, representing the Vanderbilt interests ; 
Charles Steele, representing the Morgan interests, and Joseph S. 
Harris, of Philadelphia. The other directors are : J. Rogers Max- 
well, chairman of the executive committee, also a director in the 
Lackawanna ; Robert W. de Forest, vice-president and general 
counsel ; George F. Baker, and Harris C. Fahnestock, of the First 
National Bank, New York; and Eben B. Thomas, president of the 
Lehigh Valley Railroad. 

As illustrating the closeness with which the anthracite coai 
properties of the United States are held, it is to be noted of the 
Central of New Jersey directors, four are also directors in the Le- 
high Valley and another the president of that road ; four are also in 
the Lackawanna ; three are also directors in the Erie, which in turn 
owns the New York, Susquehanna and Western. 

The Central of New Jersey owns $1,600,000 par value of the 
Lehigh Valley stock, which added to the $1,000,000 of stock held by 
the Reading, makes up $2,600,000. This compares with $5,700,000 
held by the Lake Shore. In other words, the Central of Jersey is a 
link in the Vanderbilt-Morgan-Standard Oil-Pennsylvania com- 
munity of interest scheme which controls the anthracite coal industry. 

Capitalization. 

It will be seen from the following table that the nominal capi- 
talization represents but a slight part of the Central's actual capital- 
ization. This is due to the fact that it pays in rentals and guarantees 
on the bonds of subsidiary companies a larger sum than it pays in 
interest on its funded debt. Capitalizing these rentals and guaran- 
tees at 4%, the capital account of the road on June 30th, 1906, 
would stand as follows : 



CENTRAL RAILROAD OF NEW JERSEY 149 

Common stock $27,431,800 

Funded debt 50,935,000 

Total capital $78,366,800 

Rentals capit. at 4% 62,832,500 

Approx. gross capital $141,199,300 

Securities held 23,347,400 

Approx. net capital $117,851,900 

Approx. net capitalization per mile. . $192,800 

Average miles operated 610 

Net earnings on net capitalization. . . . 8.4% 

Stock on net capitalization 23% 

Fixed Charges on total net income . . . 50% 

Factor of Safety 50% 

It will be seen that the estimated net capitalization of the road 
per mile is very high ; higher, indeed, than that of any of the other 
large eastern roads. The estimate of $192,800 compares with 
similar estimates of $161,742 for the Reading; $55,788 for the Le- 
high Valley; $132,789 for the Lackawanna; and $145,000 for the 
Pennsylvania. 

When this capitalization is compared with the net earnings the 
latter show 8.4%, as against 10.8% for the Reading; 13.7% for 
the Lackawanna; 15.5% for the Lehigh Valley; and 8.1% for the 
Pennsylvania. On the basis of net earnings, therefore, the capi- 
talization does not appear excessive. 

Much the larger part of this capitalization was in the form of 
interest-bearing debt, or its equivalent, the stock amounting to 
only one-fourth the estimated net capitalization. 

On account of the high earnings, however, the Fixed Charges 
consume only one-half of the Total Net Income, leaving a wide 
margin of safety for the underlying securities. 

Equities Owned. 

The chief holdings of the Central comprise $8,352,900 par 
value of stock in the Lehigh and Wilkesbarre Coal Company. This 
is against a total outstanding issue of $9,212,500 of capital stock, 
or more than 90%. In addition to this the Central holds income 
and mortgage bonds of the Coal Company to the amount of $11,- 
189,388 par value. 



150 



CENTRAL RAILROAD OF NEW JERSEY 



At the latest estimates the Lehigh and Wilkesbarre Coal Com- 
pany held 13,600 acres of anthracite coal lands, with an estimated 
quantity of 335,000,000 tons of unmined coal. If this coal could 
be mined at an average profit of 30 cents per ton, which is about the 
figure for the estimated earnings of the Philadelphia and Reading 
Coal Company, this would give a valuation to this property of 
around $100,000,000, so that the Central's share in the property at 
this valuation would more than pay off the company's funded debt, 
and leave the road free to the stockholders. Of course, the cash 
valuation could be nothing like this, but even if it were no more than 
one-third of this estimate, the Central's share in the property would 
amount to more than thirty millions of dollars. 

In 1905, after expending $870,000 for improvements and 
charging off $226,000 for depletion of coal lands, and $146,000 in 
other sinking fund charges, the coal company showed a net profit of 
$625,000. This, however, was carried to profit and loss, and was 
not distributed to the shareholders. 

The Central's equity in the undistributed earnings of the Coal 
Company is undoubtedly considerable and perhaps in excess of half 
a million dollars per annum. 

The next most valuable treasury asset is the $1,600,000 par 
value in the stock of the Lehigh Valley, paying in 1906 only 4%, 
but easily earning twice this. 

The company had in its treasury $1,362,000 of its own equip- 
ment bonds, and $1,116,000 of its general mortgage 4 per cents. 

The total of securities owned was carried on the books at a 
valuation of $23,447,382 and the income on these amounted to nearly 
5%. This on a 4% basis of valuation shows that the securities were 
carried at considerably below their cash value. 

Increase of Capitalization. 
Within the six and a half years from 1900, the funded debt of 
the company has shown but a slight increase and the stock none at 
all; while in the same period gross earnings have increased 33%. 
The items are as follows : 



Year 



1900 
1905-6 



Common Stock 



$27,213,800 
27,431,800 



Funded Debt 



$46,586,100 
50,935,000 



Total Capital 



$73,799,900 
78,366,800 



Gross Earnings 



$15,853,062 
20,523,030 



Increase over six and a half years : Total capital, 7% ; gross 
earnings, 33%. i 



CENTRAL RAILROAD OF NEW JERSEY 



151 



Character of Traffic. 

For years the character of the Central's traffic has been 
steadily changing. For a long time prior to 1900 the earnings from 
coal carried exceeded the earnings from merchandise freight. In 
1900 they were just about equal; in 1906 the revenue from mer- 
chandise was $8,671,000, and from coal traffic $7,462,000. The coal 
receipts showed a slight decrease from the previous year, due to the 
labor troubles in the spring of 1906, but it will be seen that even 
with this the merchandise traffic is steadily growing upon the coal 
traffic. 

So are the passenger earnings. The latter averaged around 
three million dollars annually from 1890 to 1900. In 1906 they had 
risen to nearly four million dollars. In other words, the sources of 
the Central's earnings are broadening, and it is becoming less and 
less dependent singly upon the coal industry for its prosperity. 
Nevertheless it derives more than 35% of its gross earnings from 
its coal traffic, and is, therefore, still vitally sensitive to conditions in 
this industry. 

Stability of Earnings. 

In the ten years since 1897 the gross earnings have very 
nearly doubled, while the mileage has slightly decreased, through 
the surrender of small branches. Within this period the gross 
earnings per mile have risen from $17,907 to $32,644. In the fol- 
lowing table the earnings from the New York and Long Branch 
and "other operations," are not included, since these "other oper- 
ations" are not further distinguished. In 1906 the earnings from 
this source added over $2,500,000 to the gross earnings of the "rail 
lines," bringing the total of the gross earnings of the company for 
the year up to $23,101,089. The net earnings from these "other 
operations," amounting to $455,368 for 1906, have been included 
in the total net income of the company, and are included in the 
surplus shown. 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1897 


646 


$11,568,328 


$17,907 


1898 


637 


11,505,847 


18,062 


1899 


640 


13,645,710 


21,321 


1900 


642 


13,975,646 


21,769 


1901 


639 


15,286,709 


23,922 


*1902-3 


639 


16,357,156 


25,598 


1903-4 


639 


18,421,952 


28,829 


1904-5 


602 


19,259,117 


31,991 


1905-6 


610 


20,523,130 


32,644 



* Fiscal year changed to Jvme 30, 



152 CENTRAL RAILROAD OF NEW JERSEY 

Maintenance. 

In 1902 the fiscal year was changed to June 30th. In the fol- 
lowing table no account is given of the expenditures for the first 
six months of 1902. 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1901 

1902-3 

1903-4 

1904-5 

1905-6 


2, 183,594 
2,377.162 
2,724,485 
3,077,570 
3,150,262 

2,702,614 


$2,131 
2,903 
2,705 
2,813 
2,850 

$2,680 


$2,589 
3,455 
3,265 
3,754 
4,218 

$3,456 


$4,720 
6,358 
5,970 
6,567 
7,068 


Average 


$6,136 



Miles extra main track, 295. 



Iyehigh Valley. , 
Lackawanna.... 
Erie 



Traffic Density 



2,771,846 
3,079,629 
2,434,819 



Maintenance per Mile 



Way 



«f>2,588 
4,754 
1,861 



Equipment 



$3,429 
3,579 
3,216 



Total 



$6,017 
8,333 
5,077 



It will be seen that the maintenance charges of the Central 
compare favorably with those of the Lehigh Valley, but are on the 
average 25% below the Lackawanna, with only a slightly larger 
traffic density. The Central's maintenance is on about the same 
scale as that of the Reading; that is, with about three fourths the 
freight density, its expenses per mile are about three-quarters 
as large. 

The expenditures for equipment for 1906 were sufficient 
to allow $1,727 per locomotive; $415 per passenger car, and $53 
per freight car. The item for locomotives is rather low; other- 
wise the charges are fairly liberal and probably adequate. It is 
not likely, however, that any great amount of earnings is con- 
cealed here. 

Improvements. 

When we come to improvements, no such large items are to 
be found charged off from earnings as in the Lackawanna, 
though the item for 1906 was considerable. For five years these 
special appropriations have been as follows: 



CENTRAL RAILROAD OF NEW JERSEY 



153 



1901 $540,000 

1903-4 1,665,146 

1904-5 2,679,702 

1905-6 3,373,798 



Total $8,258,646 



This compares with similar appropriations of $5,713,000 by 
the Lehigh, and $16,934,000 by the Delaware and Lackawanna. 

In 1906, these special appropriations were sufficient to add 
75% to the nominal maintenance charges, that is to say they were 
sufficient to bring up the total amount for maintenance and im- 
provements for 1906 to over $12,000 per mile. 

Surplus Earnings. 

In the following table the amounts of surplus shown are be- 
fore the special appropriations noted above have been charged 
off. In 1906, after charging off $3,373,798 for improvements, 
there was still left $2,286,000 of net surplus, sufficient for the full 
8% dividend and a small surplus to Profit and Loss. 

In other words, with fair maintenance charges the road 
devoted a dollar and a half for improvements for every dollar of 
dividends paid. This is an excellent showing. 



Year 



1900 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 



Surplus 



£2,619,363 
3,763,484 
2,134,796 
4,326,203 
5,032,422 
5,659.603 



Per cent Earned 


on 


Common 


M 1 


9.7 


If 13.9 
W 7.9 


n 


16. 
18.6 


■i : 5 


21. 



Dividends Paid 
on Common 



Average Price 



$182 
171 
181 
171 
174 
212 



Dividend Record. 

Prior to 1889 dividends on the Central were a rare event. 
Since then, however, it has paid steadily, rising in the last four 
years to an eight per cent, basis. The record is as follows : 

YEAR. % YEAR. % 

1883 \y 2 1890 s 6 

1884 A]/ 2 1891 6y 2 

1885-8 — 1892-4 7 yearly 

1889 3 t 1895 Sy 2 



154 CENTRAL RAILROAD OF NEW JERSEY 

YEAR. % YEAR. % 

1896 5 1900-1 5 yearly 

1897 Ay A 1902-7 8 yearly 

1898-9 4 yearly 

Balance Sheet. 

At the close of the fiscal year of 1906, the road showed : 

Current assets $6,018,163 

Current liabilities 5,968,913 



Leaving a balance of $49,250 

There was due in dividends, interest and taxes accrued 
nearly $2,000,000, showing that with regard to immediate re- 
sources the road was not overly well supplied. 
The item of cash was $1,138,643. 
The balance to the credit of profit and loss was $9,515,631. 

Investment Value. 

From a road that formerly journeyed from one receivership 
to another, the Central has risen to the position of one of the 
solidest companies of the east, and few securities are more highly 
regarded. 

Since 1900 the stock has not sold below $115 per share, and 
since it was put upon an 8% basis, it has not sold below $153 
per share. It rose to a record figure of $239 in May of 1906. 
At the latter price the yield upon the stock was only 3.3%, and 
the price was evidently boosted to this figure on the theory of a 
prospective increase in dividend, since the control of the road 
is owned outright and the floating supply can be of no value, save 
as an investment. With money ruling between 5 and 7^% in 
1906, it is evident that as an investment there were many more 
attractive issues. 

There is at least one consideration that would weigh heavily 
against the disposition to increase an already high dividend rate. 
That is the widespread notion that the anthracite coal roads are 
earning a great deal more money than they have any right to, 
and a further increase in the dividend might readily stir up a 
lively agitation for a reduction in freight rates. The rates on the 
Central have never been low, and they are still high, the aver- 
age rate per ton per mile amounting to about .84c. for 1906. This, 
considering the enormous coal traffic of the Central means a high 
average rate for coal carriage. 



CENTRAL RAILROAD OF NEW JERSEY 155 

Earnings compared, there was undoubtedly a better basis for 
an increased dividend on the Central than, for example, on the 
Pennsylvania ; but it must be remembered that the Pennsylvania 
has stood on a 6% basis, and that an increase from this does not 
mean so much in the public mind as an increase from 8%. 

In the very moderate decline of 1906, the stock sold down 
to $204 per share. On this basis it is about a 4% stock, earning 
on an average more than twice its dividend, with a steadily 
growing traffic, and an enormous indeterminate holding of coal 
lands. In the general slump of March, 1907, the stock sold down 
to $165. Purchased somewhere between this and $200, it would 
probably yield the investor a fair interest upon his money, with a 
steady increment in the value of his holding from year to year. 



CHESAPEAKE AND OHIO RAILWAY. 

The Chesapeake and Ohio is one of the leading "soft coal- 
ers," whose chief business is the carriage of bituminous coal 
from the fields of West Virginia and Virginia to tide-water. 
Throughout its entire length it is to all intents paralleled by the 
Norfolk and Western, and this paralleling is very closely pur- 
sued alike in their gross earnings, character and development of 
traffic, ownership and management. 

Both these roads are in turn being paralleled by the new 
Deepwater and Tidewater Railroad, which, so it is understood, 
Mr. H. H. Rogers, of the Standard Oil Co., is building from the 
Pocahontas coal fields to Norfolk, Va. 

History. 

The Chesapeake and Ohio came into existence in 1868, with 
the merger of the Virginia Central and Richmond and Covington 
Railroads. The Virginia Central was one of the first railways in 
the United States, having been chartered as far back as 1836, but 
its completion was delayed in one way and another until 1867. 
Soon after the consolidation the company defaulted its interest 
and efforts towards readjustment proving futile, it finally went 
into the hands of a receiver in 1875. It was then reorganized into 
the present company, in 1878, under the control of the late C. P. 
Huntington. The road did not prosper under the Huntington 
management, and it was allowed to deteriorate, so that its inter- 
est payments were again defaulted and a second reorganization, 
this time without foreclosure, was carried out under the auspices 
of Drexel, Morgan and Company, when Vanderbilt and Morgan 
interests gained control of the road. 

From this onward its progress was steady. The road was 
extended westward to Cincinnati, the Richmond and Allegheny 
was absorbed in 1890, and another small road in 1892. Owing to 
continuous freight wars, however, the road was not prosperous, 
and its average rates fell steadily to 1899. In the following year, 
in carrying out the Community of Interest idea inaugurated by 

(156) , 



CHESAPEAKE & OHIO 157 

Mr. Cassatt of the Pennsylvania, the latter road made large pur- 
chases of its stock, so as to obtain, with the Vanderbilt interest, 
a controlling interest in the Chesapeake. Since this time its 
earnings have grown very rapidly, the average of its freight rates 
has been raised, and the road has risen to a highly prosperous 
condition. With the absorption of some smaller lines, its 
operated mileage in 1906 reached 1,826 miles, and with the track- 
age of other lines used jointly, in 1906, the road had 233 miles of 
second track. 

Ownership. 

On July 1st, 1905, the New York Central owned stock repre- 
senting an outlay of $1,638,445, and the Big Four of $2,453,569. 
At the same time the Pennsylvania Railroad proper owned $10,- 
130,000 par value of the stock, the Pennsylvania Company, $4,- 
000,000, and the Northern Central, $1,500,000 par value, a total 
for the Pennsylvania interest of $15,630,000 par value. The New 
York Central stock was purchased when the stock was held 
at a very low figure, and it is understood that these holdings 
with the Pennsylvania's constituted a controlling interest in the 
road. The Pennsylvania stock was disposed of in the Fall of 
1906 to the banking firm of Kuhn, Loeb & Co. 

Under the former regime, the directorate was divided be- 
tween the two controlling interests, the Pennsylvania being rep- 
resented on the board by its three vice-presidents, John P. Green, 
Samuel Rea, and John B. Thayer. The New York Central had 
also three directors : William H. Newman, president of the New 
York Central, Chauncey M. Depew, and H. McK. Twombly. 
The other directors were George W. Stevens, president, and Decatur 
Axtell, vice-president of the Chesapeake and Ohio ; and Henry T. 
Wickham, of Richmond, Va., a long time director of the road. 

In 1905 the Chesapeake and Ohio reported 1,478 stockhold- 
ers, and in 1906 the minority interest, representing about $18,- 
000,000 par value of the capital stock, was organized by Messrs. 
Scott & Stringfellow, of Richmond, Va., for the purpose of 
securing an increase in the dividend rate. 

Up to 1906 the controlling interest in the Norfolk and West- 
ern was owned by the Pennsylvania, so that the chief competitor 
of the Chesapeake and Ohio was under practically the same own- 
ership. At its western terminals, the road operates in close 
traffic arrangements with the Vanderbilt and Pennsylvania lines 



15S CHESAPEAKE & OHIO 

and especially the Big Four, and it is jointly interested with the 
latter in the Louis ville and JefTersonville Bridge. 

The Chesapeake and Ohio owns a one-sixth interest in the 
majority of the common stock of the Hocking Valley Railway, 
and it is also joint guarantor with five other roads in the bonds 
of the Richmond-Washington line. 

Capitalization. 

On June 30th, 1906, the capitalization of the road stood as 
follows : 

Com. stock $62,790,700 

1st Preferred 7,700 

2nd Preferred 700 

Total stock $62,799,100 

Funded debt 86,680,354 

Due on Equipment 9,824,666 

Nominal capital $159,304,120 

Rentals cap. at 4% 7,792,500 

Approximate gross capitalization. . .$167,096,620 
Securities held 28,692,489 

Approx. net capitalization $138,404,131 

Approx. net cap. per mile $77,142 

Miles operated 1,794 

Net earnings on net capital 7.0% 

Stock on net capital 45% 

Fixed Charges on total net income. 53% 

Factor of Safety 47% 

It will be seen that the estimated capitalization per mile is 
considerably below that of the Norfolk and Western, its %77 ,- 
142 per mile standing against $96,108 per mile for its competitor. 
Likewise the Chesapeake and Ohio shows a slightly higher per 
centage of net earnings on the estimated net capitalization, its 
figure of 7% standing against 6.4% for the Norfolk and Western. 
On the other hand a smaller percentage of its capitalization is 
represented by stock, its 45% standing against 52% for the Nor- 
folk and Western. Similarly fixed charges consume a higher 



CHESAPEAKE & OHIO 159 

percentage of the total net income, the fixed charges for 1906 
consuming 53% as against 37% for the Norfolk and Western. 
The Factor of Safety for the underlying securities of the Chesa- 
peake and Ohio is therefore considerably less than that of its 
competitor. 

During the fiscal year of 1906, the road purchased the entire 
capital stock and property of the Coal River Railway, including 
eighteen miles of completed road and extensions under away, 
amounting to about 50 miles, in order to develop valuable coal 
properties. The road will guarantee $3,000,000 of bonds of this 
road. 

In the same year the stock of the Western Pocahontas Cor- 
poration was purchased at a price of $250,000, the road guaran- 
teeing in addition $750,000 of bonds. This purchase carried with 
it control of about 30,000 acres of coal and timber land. 

Equities Owned. 

The $34,177,000 par value of securities owned is carried on 
the books of the company at a valuation of $28,692,489. The 
company does not itemize its Other Income, but the total 
amount received from other sources than earnings in 1906, 
amounted to only $204,352, which represents less than one per 
cent, on the valuation of the securities held in the treasury. By 
far the larger part of these securities were the stocks and bonds of 
the Chesapeake and Ohio Railway Company of Kentucky, the 
parent road holding a par value of slightly over $25,000,000, 
equally divided between stocks and bonds. 

Of the remainder the most notable items were $3,500,000 
of the bonds of the Covington, Cincinnati and Eastern Railroad, 
and $1,500,000 of its stock; and $1,154,000 par value of the Hock- 
ing Valley common stock, representing one-sixth interest in the 
control of the road. The road is interested in and guarantees the 
bonds of the Norfolk Terminal and Transportation Company, 
the Chesapeake Grain Elevator Company, the Passenger and Belt 
Railway Company, and the Chesapeake Steamship Company, 
Limited. None of these guarantees is of large amount. 

Both the Grain Elevator Company and the steamship line 
were run at a small nominal loss. In 1905 the railway company's 
interest in the steamship company was sold to the minority 
stockholders in England under a contract to add additional 
steamers and continue the service for a term of years. From 



160 



CHESAPEAKE & OHIO 



this sale $400,000 was derived, which was invested in five hundred 
box cars. Through this sale the company ceased its purchase of 
the steamer company's debentures to which it was obligated and 
on which it paid in 1905, $48,835. 

None of its holdings represent equities of any considerable 
value. 

Increase of Capitalization. - 

The capitalization of the Chesapeake and Ohio, even under 
the reorganization of 1888 was heavy and the road has been 
handicapped on this account and had to grow up to its capitali- 
zation through the steady increase of business. 

Neglecting a very small amount of preferred stock, the items 
stand as follows : 



Year 


Common Stock 


Funded Debt 
and Equipment 


Total 


Gross Earnings 


1899-0 
1905-6 


$60,527,800 
62,790,700 


$70,844,608 
96,505,020 


$131,386,408 
159,295,720 


$13,402,070 
24,602,988 



Increase over six years: Total capitalization, 21%; gross 
earnings, 83%. 

The increase of capitalization has been divided between the 
extension of the road, for new construction, or the purchase of 
smaller lines, and the purchase of new equipment. Since 1900, 
the road has added about 350 miles of main line and a consider- 
able amount of second track. 

Character of Traffic. 

^Carriage of bituminous coal makes up 57% of the tonnage 
of the road and coal and coke together over 60%. The next 
largest item is lumber, amounting to nearly 11%, and the rest 
of the traffic is evenly distributed over various items. The car- 
riage of grain and other mill products amounted to only a little 
over 4%. 

Contrary to many other roads, the coal tonnage of the 
Chesapeake and Ohio has increased very much more rapidly than 
its other freight. Since 1899 coal tonnage has more than doubled 
while the general business of the company has increased a little 
more than a quarter. In other words, the road is becoming more 
and more dependent upon the prosperity of a single industry. 



CHESAPEAKE & OHIO 
Stability of Earnings. 



161 



Like the Norfolk and Western, the gross earnings of the 
road have shown astonishing development since 1896, but of the* 
two, the Norfolk and Western has increased considerably faster. 
The gross earnings of the latter rose in this period from $10,900,- 
000 to $28,500,000, while the Chesapeake's earnings rose from 
about the same figure to only $24,500,000. There was a still 
more striking discrepancy in the earnings per mile. These for 
the Norfolk and Western in 1896 were $6,946 per mile as against 
$7,575 for the Chesapeake and Ohio ; while in 1906 the figure for 
the Norfolk and Western was $15,373 as against $13,714 for the 
Chesapeake. The mileage and earnings for the Chesapeake and 
Ohio through these years stand as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile - 


1895-6 


1,360 


110,221,131 


$7,575 


1896-7 


1,360 


10,708,133 


7,873 


1897-8 


1,360 


11,788,557 


8,668 


1898-9 


1,445 


12,009,839 


8,311 


1899-0 


1,476 


13,402,070 


9,080 


1900-1 


1,506 


15,371,541 


10,206 


1901:2 


1,618 


. 16,524, 379 


10,212 _ 


1902-3 


1 637 


16,711,602 


10,208 


1903-4 


1,651 


19,297, 525 


11,688 


1904-5 


1,672 


20,724,371 


12,395 


1905-6 


1,794 


24,602, 988 


13,714 



Though the earnings of the road have increased— heavily 
within this period, a considerable part of this prosperous show- 
ing is due to an increase in rates. In 1899, the bedrock year for 
all the roads of the country, and likewise for the Chesapeake and 
Ohio, the average rate per ton per mile had declined to .36c. In 
1906, the average rate was .42c, an increase of .6 mills. In 
reality the rise in rates was considerably greater than this, since 
the average earnings of the coal tonnage in 1906 was only .32c. 
as against .58c. for ordinary merchandise traffic, and as already 
noted the coal tonnage has been increasing about four times as 
fast as its other traffic. It follows, therefore that the rates must 
be materially higher than in 1899 in order to bring up the aver- 
age freight rates to .42c. 

The increase in the average freight rate from 1899 repre- 
sents upwards of $2,700,000 in the gross earnings for 1906; that 
u 



162 



CHESAPEAKE & OHIO 



is to say, maintenance and other charges remaining the same, 
more than half the entire surplus for 1906 would have been 
wiped out had the freight rates of 1899 been still in force, and 
so would the entire average surplus for the six years under view. 

What the Community of Interest plan has enabled this and 
other roads to do is to materially increase its rates, spend very 
much higher sums annually for maintenance and improvements, 
and still show a comfortable surplus at the close of the year. 
Stated in other terms, since 1899, the gross tonnage of the road 
has increased 63%, while its freight earnings have increased 77%. 

The astonishing increase in tonnage in 1906 will hardly es- 
cape the attention of the investor, amounting as it did to 23% 
or nearly one quarter of the total traffic of the road. This increase 
was altogether abnormal and it is scarcely possible that anything 
like this rate of increase could be maintained for any length 
of time. 

Maintenance. 

The maintenance for a period of six years has been as follows : 





Traffic Density 


Maintenance per Mile 


Total 


Year 


Way 


Equipment 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


2,026,013 
1,974,250 
1,606,899 
1,917,441 
2,244,776 
2,575,392 


$1,472 
1,345 
1,331 
1,397 
1,309 
1,471 


$1,496 
1,703 
1,636 
2,216 
2,432 
2,491 

$1,995 


$2,968 
3,048 
2,967 
3,613 
3,741 
3,962 


Average 


2,057,510 


$1,387 


<p3,382 






Traffic Density 


Maintenance per Mile 


Total 




Way 

$1,876 
1,563 


Equipment 


B & O 


2,282,704 
2,190,314 


12,416 
1,903 


$4,292 


Norfolk & West- 


3,466 



The average traffic density through this period was about 
the same with the Norfolk and Western as with the Chesapeake 
and Ohio, and their average expenditure per mile was likewise 
about the same, but in 1901 the average expenditure for mainten- 
ance was $270 per mile higher on the Chesapeake than on the 
Norfolk, while in 1906 it was $460 per mile less. In other words 
the maintenance charges on the Norfolk road have risen very 



CHESAPEAKE & OHIO 163 

much more rapidly than on the Chesapeake, and had the Chesa- 
peake been maintained in 1906 on the same scale as the Norfolk, 
this would have added upwards of $800,000 to its maintenance 
and reduced the surplus shown by a corresponding amount. 

The report of the company itemises the maintenance and 
equipment and the sums in 1906 amounted to an average of $2,- 
114 per locomotive in service, $1,090 per passenger car, and $92 
per freight car in service. These were about the same charges 
as in 1905, while the maintenance of way was about $160 per 
mile higher. This increase in no wise corresponds to the 
astonishing increase of tonnage in 1906, and it is therefore doubt- 
ful if the items of maintenance for 1906 conceal any considerable 
sum of earnings. It is evident moreover, that with a competing 
road with almost identically the same territory and traffic, spending 
four or five hundred dollars per mile more on its maintenance, 
the Chesapeake would hardly be in a position to reduce its 
charges and still keep its property up to the competitive stand- 
ard. Reference to the table of the traffic density for the Norfolk 
and Western will show that the latter likewise had a quite abnor- 
mal increase of traffic for the year, but at the same time the Nor- 
folk and Western added $425 per mile of road to its maintenance 
charges, while the Chesapeake and Ohio added only about $229 
per mile. All this has a very material bearing upon the question 
of increased dividends for the Chesapeake. 

Improvements. 

In addition to the regular charges for maintenance consider- 
able sums have been set aside from the surplus earnings for im- 
provements. The items which follow include $450,000 in 1904 and 
$735,000 in 1905 for principal of equipment trusts: 

1900-1 $1,304,172 

1901-2 1,440,815 

1902-3 591,012 

1903-4 1,311,366 

1904-5 1,052,477 

1905-6 2,522,739 

Total $8,222,581 

In the appropriations for 1906 $988,333 was payment on the 
principal of equipment trusts, and $1,534,406 for improvements and 
new equipment. 



164 



CHESAPEAKE & OHIO 



The total of $8,322,581 for the six years compares with $16 r 
220,001 for the Norfolk and Western. In other words, with about 
the same average traffic- density, and with slightly lower average 
maintenance charges, the Chesapeake and Ohio has set aside from 
its : earnings nearly $8,000,000 less than its chief comeptitor. 

Surplus Earnings. 

With its liberal scale of maintenance charges, the nominal sur- 
plus shown by the Chesapeake and Ohio up to 1906 has been rela- 
tively small. The figures for six years, have been as follows: 







Per cent. 


Dividends 


Average 
Price 


Year 


Surplus 


Earned on 


Paid on 






Common 


Common 


1900-1 


$2,001,897 


3.3 


1 


.44 


1901-2 


2,060,409 


3.4 


1 


. 48 


1902-3 


1,269,604 


2.1 


1 


40 


1903-4 


1,944,511 


3.1 


1 


37 


1904-5 


. 2,871,639 


4.6 


1 


53 


1905-6 


4,607,223 


7.3 


1 


58 



This represents an average surplus of $2,500,000. On about 
the same scale of maintenance charges the Norfolk and Western 
was able to show in the same period an average surplus of about 
$5,700,000, or more than twice that of the Chesapeake and Ohio. 
: This was due in part to a more rapid increase in the gross earnings, 
and in part to the fact that Fixed Charges on the Norfolk consume 
a lower percentage of total net income than on the Chesapeake. 

It will be noted that the increase in the surplus shown for 1906 
was very heavy, amounting to nearly $2,000,000 more. than the pre- 
vious year. As already explained this was in part accomplished by 
only a very slight rise in the total of the maintenance charges per 
mile, as against a very astonishing increase pf" nearly 25% in the 
total tonnage of the road, and as against an increase of a full 15% 
in the traffic density. Had, the increase in the maintenance charges 
been directly proportioned to the increase in traffic density, mainte- 
nance would have been $561 per .mile higher than in 1905, or $340 
more than it actually was, and. $340 per mile on the total mileage of 
the road would have added about $600,000 to the maintenance 
charges.. 

Furthermore it has already been noted that with but a slightly 
higher traffic density, the maintenance' charges on the Norfolk and 
Western were $460 more on the Norfolk than on the Chesapeake in 
1906. Either way it may be regarded, therefore, the surplus shown 



CHESAPEAKE & OHIO 165 

by the Chesapeake in 1906 would have been between $600,000 to 
$800,000 less had its own standard of maintenance in 1905 or that of- 
its chief competitor in 1906 been equalled. 

The Balance Sheet. 

The balance sheet at the close of the fiscal year of 1906 did not 
show the company in very good position as to working capital. 

The current assets show $4,741,611 

Current liabilities 4,650,672 

Leaving a working balance of $90,939 

In addition to the ordinary current liabilities, there was an item 
of bills payable amounting to $2,045,000. It will be seen, therefore, 
that the company was in need of working capital. 

The item of cash was $1,523,951. The amount to credit of- 
Profit and Loss was very small, amounting with the 1906 addition, 
of $1,005,000, to only $1,534,713. The fact that the surplus shown 
was so small, combined with the need of working capital has been 
a factor militating against any increase of dividend. 

Investment Value. 

Since 1899 a one per cent, dividend has been paid annually upon; 
the capital stock, and these are all the dividends that have ever been 
paid by the company save the very slight amount paid upon the pre- 
ferred stock. In 1906 the minority holders combined to urge upon 
the management an increase of this dividend, adducing in favor Of 
this a series of very attractive figures and pointing especially to the 
high earnings of the year. 

But if the surplus shown since 1901 be averaged, the yearly 
amounts represented only 3.8% oh the capital stock. It will be seen, 
therefore, that the percentage of 7.3 shown in 1906 was quite be- 
yond the normal, and this high percentage was due, as already ex- 
plained, to a very abnormal increase in the traffic of the road, with a 
rather small increase in the maintenance charges for the year. 

If the average for the six years had been equally divided be- 
tween dividends and improvements, according to the traditional 
Pennsylvania policy, the road would have paid only 1^% as against 
1% actually paid. 

The maintenance charges since the advent of the Pennsylvania 
influence have been considerably increased and are undoubtedly 
liberal, and in addition to this, appropriations for improvements have 
not been niggardly. This policy of improvement has resulted in a 
very heavy increase in earnings in the face of a rather small in- 



166 CHESAPEAKE & OHIO 

crease in the capital, and undoubtedly the Chesapeake and Ohio is in 
a position at least to double its dividend if not more. 

The Chesapeake & Ohio had obvious need of funds to take care 
of the remarkable growth of its business, but conditions of 1906-7 
were not propitious for the sale of bonds ; it is too much over- 
capitalized to sell its stock and it was this situation which undoubt- 
edly was decisive in the management's refusal to increase the divi- 
dend rate. It was to be assumed that the necessary temporary 
financing would be by means of short time notes and that with the 
return of more normal bond conditions, funds would be provided by 
further bond issues. If this were done on reasonable terms, the 
dividend rate might readily be increased to perhaps 3%. 

The future of the stock will be very materially influenced by the 
disposition of the Pennsylvania's holdings, sold to Messrs. Kuhn, 
Loe-b & Co. The latter are known to be closely associated with the 
Standard Oil interests in many enterprises, and they were also pur- 
chasers of half of the Pennsylvania's holdings in the Norfolk & 
Western. In turn, the Deepwater & Tidewater, paralleling both 
these roads, is the creation of Mr. H. H. Rogers, and in the minds 
of some this suggested that in one fashion or other a holding com- 
pany might take over an interest in all three roads, insuring a large 
degree of harmony in their management. This holding company 
might readily be the Union Pacific, which has also large holdings in 
the Baltimore & Ohio, in which case the soft coal industry of the 
East would come very largely under a single control. 

In any event it is certain that the Chesapeake & Ohio is earning 
much more than its 1% dividend, and in anticipation of an in- 
creased rate in 1906 the stock was run up to $65 per share. It re- 
ceded to $32 a few months later in the general decline in prices. 
It might readily go lower, but purchased at anything like the latter 
figures it should certainly show large profit for a long pull. 



CHICAGO AND ALTON RAILROAD. 

The "Alton" as it is familiarly known, is one of the inter- 
mediate roads of the interior which, by reason of its strategic 
advantages, has always occupied an exceptional position among 
western railroads. It operates the most direct line between 
Chicago and St. Louis, with another extending to Kansas City, 
and numerous branches throughout central Illinois. It is not 
a large road, has been but little extended in many years, and 
still operates less than a thousand miles. But it has been within 
recent years immensely improved, so that it is now one of the 
best equipped properties in the middle territory. The new man- 
agement dates from 1899, since which time the policy and char- 
acter of the road have been considerably altered. 

Previous to this time the Alton had occupied a position of ex- 
ceptional independence, and was long a tower of financial strength 
among western roads ; furthermore, by reason of its aggressive 
management a thorn in the sides of its competitors. This was 
under the old Blackstone management which for years directed 
the destinies of the Alton, carrying it through the heavy depres- 
sion of 1893-7, with apparently tremendous success, and main- 
taining its old high rate of dividends while the dividends of other 
roads were passed, or sharply cut, or the roads themselves passed 
into bankruptcy. The stock was quoted at high figures, and 
coveted by investors. 

In 1899, control of the property was purchased by a syndi- 
cate headed by E. H. Harriman, Geo. J. Gould, James Stillman 
and Kuhn, Loeb & Co. It was found that the road was in need 
of new equipment, of reconstruction, and in fact of almost every- 
thing that goes to the making of a fine railroad property. It 
had largely to be rebuilt. To do this a heavy issue of new 
securities was required, and in 1900 the affairs of the com- 
pany were reorganized through the creation of the Chicago and 
Alton Railway Company, which leased the road for a period of 
99 years, at the same time acquiring practically all of the stocK 

(167) 



168 CHICAGO & ALTON 

of the old road. The latter was exchanged for the stock of the 
new company, which had an authorized capital of $20,000,000 
of preferred and $20,000,000 of common stock. 

In 1906 these two companies were consolidated into the new 
Chicago and Alton Railroad Company, with practically the same 
capitalization as the Railway company. Under the new arrange- 
ment the stockholders of the railway company exchanged their 
stock, share for share for the preferred and common of the new 
railroad company, while the few remaining shareholders of the 
old railroad company, the original Alton, were given the oppor- 
tunity to exchange their stock for cumulative 4% prior lien and 
participating stock of the new company, of a total issue of 8,993 
shares. The road is henceforth to be operated by the new com- 
pany without the former complications of leases, the maintenance 
of two sets of books and so forth. 

During 1906 about 55 miles of new trackage heretofore 
operated by the Quincy, Carrolton and St. Louis, brought 
up the total operated mileage to 970 miles. Besides this there 
were 126 miles of additional main track, while other lines, jointly 
operated with the Big Four and the Atchison, bring up the 
practical total of double track to over 200 miles. 

Ownership. 

In 1904-5 when the Alton seemed solidly established under 
L T nion Pacific management, it was announced that interests con- 
nected with the Rock Island had purchased very near the control, 
the purchase being one of the memorable "coups" of the "Street". 
It turned out that the Harriman-Union Pacific interests owned 
but little more than a quarter of the total stock. The Rock 
Island interests did not however, appear to have absolute control, 
and the prospective struggle for supremacy was avoided through' 
the formation of a voting trust in which the stock held by the 
Rock Island, the Union Pacific, and some other interests were 
joined. The amount acquired by the Rock Island was $4,470,000 
par value of the preferred and $14,320,000 par value of the com- 
mon, constituting slightly less than a majority. On June 30th, 
1906, the Union Pacific owned $10,343,100 par value of the pre- 
ferred. In June, 1907, the voting trust agreement was abrogated 
and the road passed entirely under Rock Island control. 

Under this arrangement the directorate of 1906, was made up 
as follows : W. H. Moore, James H. Moore, D. G. Reid, Robert 



CHICAGO & ALTON 169 

Mather and B. F. Yoakum, and John J. Mitchell, president of 
the Illinois Trust Company, representing the Rock Island; E. 
H. Harriman and James Stillman, representing the Union Pacific; 
James B. Forgan, president of the First National Bank of Chi- 
cago; S. M. Felton, president of the Alton; Norman B. Ream, 
also a director in the Burlington, the Erie, the Baltimore and 
Ohio and other roads. 

In 1906, Benj. F. Yoakum, at the head of the Rock Island- 
'Frisco System, was elected chairman of the executive com- 
mittee, succeeding E. H. Harriman, according to the agreement 
by which the Rock Island and the Union Pacific should control 
the road in alternate years. The other members of the executive 
committee were E. H. Harriman and James Stillman, represent- 
ing the Union Pacific, and W. H. Moore and D. G. Reid, repre- 
senting the Rock Island. 

Despite the fact that the control of the road has been so 
greatly sought, the stock is still apparently widely distributed, 
the road reporting in 1905 2,039 shareholders. This stock is 
closely held and the floating supply is small. 

At the present time the road is operated in harmony with 
the Rock Island and with the Union Pacific, and in direct 
affiliation with these two roads. 

Capitalization. 

On June 30th, 1906 the capitalization of the road stood as 
follows : 



LIJ 



Common stock , . $19,542,800 

Preferred stock 

-Non. cum. 4% 19,544,000 

Cum. 4% prior lien 899,300 

Total stock "... $39,986,100 

Funded Debt (net) $64,350,000 

Guaranteed stocks 3,693,200 

Equip. Notes 3,016,918 

Total capital $111,046,218 

Average capitalization per mile $114,480 



170 CHICAGO & ALTON 

Average miles operated 970 

Net earnings on net capitalization. . . . 3.7% 

Stock on net capitalization 36% 

Fixed Charges on total net income. ... 73% 

Factor of Safety 27% 

Of the funded debt, $8,000,000 of the refunding bonds are 
held by the road itself, $7,000,000 of these being deposited as 
security for the $5,000,000 of collateral trust notes, and the 
balance in the treasury of the company. This $8,000,000 has been 
excluded from the table and the funded debt given is net. The 
securities held by the company are not separately itemized, but 
from the income account it appears that the $8,000,000 of bonds 
noted above is the only item of importance. 

Beyond the interest on guaranteed stocks, the amount paid 
in rentals of the leased lines is small, and as the face value of 
these stocks is included in the estimate of capitalization given 
above, this item is not further considered. 

It will be seen that the capitalization of the road for a 
middle west line is very high, amounting to $114,480 per mile. 
The Alton is essentially a main track road, with branch lines 
of comparatively small amount, and on this account its mileage 
capitalization would be much higher than large lines like the 
Burlington, the Rock Island or the North Western, occupying 
much the same character of territory, but having a much larger 
proportion of branch mileage. 

Nevertheless, even with this reservation, it will be seen that 
the capitalization is very high, since the net earnings on this 
capitalization represent only 3.7%, as against 10.5% for the 
North Western, and 9.7% for the St. Paul. Moreover, a large 
part of the capitalization is fixed interest debt, the stock represen- 
ting only 36% of the total capitalization. 

Still further evidencing the high capitalization is the fact 
that the Fixed Charges consumed in 1906 73% of the total net 
income. This left a Factor of Safety for the underlying securi- 
ties and guarantees of only 27%. On a road of other than the 
stable earnings of the Alton and its close association with two 
great systems, affording assurance of steady business, this per- 
centage would be dangerously low. As a matter of fact the road 
is in excellent condition and despite the large amounts consumed 
by Fixed Charges, its securities enjoy a fair degree of confidence. 



CHICAGO & ALTON 



171 



Since the Alton's holdings of other securities are relatively 
small, it has no valuable equities in other roads. 

Increase of Capitalization. 

Since the organization of the new Railway company in 1899, 
there has been no increase in the capital stock save the new 
issue of cumulative 4% prior lien stock already noted. Since 
1902 the fixed interest debt has increased about $13,000,000, or 
about 25%. In the same period the increase of tonnage has 
about corresponded with the increase in the debt. The increase 
in gross earnings has been rather less than this, due to the re- 
duction in the average freight rate received. For five years 
the items compare as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded debt 
and guaran- 
teed Stock 


Total 
Capital 


Gross 
Earnings 


1900-1 
1905-6 


$19,542,000 
19,542,000 


$19,544,000 
20,443,300 


$54,000,000 
71,060,118 


$93,086,000 
111,045,418 


$9,036,655 
11,586,094 



Increase over five years : Total capital, 19% ; gross earn- 
ings, 28%. 

Character of Traffic. 

The Alton does not separately itemize its tonnage, but the 
report of 1906 shows that 46% of its tonnage is from the car- 
riage of coal. This item has very considerably increased within 
six years, and the revenue accordingly, but the rate received 
from this class of business is low, since the total revenue derived 
from this source constituted only 15% of the gross earnings of 
the road. 

Passenger earnings are large, the passenger revenue amoun- 
ting to about 28% of the total. 

Stability of Earnings. 

Within many years the mileage of the road has remained 
very nearly the same, the total increase in ten years amounting 
to only 126 miles. In the same period the gross earnings have 
risen from $6,673,000 to $11,586,000. 

The figures of 1896-7, however, were those of a period when 
ihe Alton's earnings had heavily declined. Under the old Black- 
stone management, in 1892, the gross earnings per mile amounted 
to $9,166, a level that was not regained until eight years later. 



CHICAGO & ALTON 



Since the new management took hold in 1899, the receipts per 
mile have increased from $9,118 in 1900, to $11,940 in 1906, an 
increase of a little oyer 30%. The items by years are as follows: 



Year 


Miles Operated 

844 


Gross Earnings 


Per Mile 


1896-7 


$6,673,605 


$7,911 


1897-8 


844 


6,286,569 


7,542 


1898-9 


856 


6,546,590 


7,765 


1899-0 


855 


7,796,449 


9,118 


1900-1 


919 


9,036,655 


9,826 


1901-2 


920 


9,225,739 


10,031 


1902-3 


915 


10,071,092 


11,001 


1903-4 


915 


11,425,853 


12,484 


1904-5 


• 915 


11,797,313 


12,890 


1905-6 


970 


11,586,094 


11,944 



It will be seen that both the total gross earnings and the 
earnings per mile were higher in 1905 than in 1906. This was 
due in ffa L rt to the fact that in 1904-5 the road did a heavy busi- 
ness in connection with the St. Louis Fair, and for the rest to 
a decline in the average freight rate received. The reduction in 
the rate from 1905 was from .69c to .64c, representing a difference 
in the yearns freight business of over $700,000 in revenue; 

In the report for 1906 President Felton called attention to 
the fact that in 1898, the year before the property was acquired 
by the present management, the average rate per ton per mile 
was, .83c as compared with .64c in 1906. This reduction re- 
presented a difference on the year's earnings of $2,248,000. Presi- 
dent Felton remarks that "from this it would appear that the 
benefits derived from the investment of a large amount of money 
in the property have accrued mostly to the public." 

The decline in the receipts from passenger traffic for 1906 
amounted to $775,000 from the previous year. 



Maintenance. 

It is obvious from the following table, that with a traffic 
density of about 1,200,000 ton-miles per mile of road, the main- 
tenance charges have been heavy, and especially in the three last 
years shown, when the amount for maintenance was nearly 
$3,000 per mile. 

It would be foolish, however, to compare this maintenance 
with the maintenance charges of great systems like the Rock 
Island, the Burlington or the North Western, having extensive 
mileage through thinly settled territory, with many branch lines 



CHICAGO & ALTON 



173 



on which the traffic density is very low. Considering the Alton's 
larger passenger business it is probable that these amounts are 
none too high, in comparison with the standards set by pros- 
perous roads in recent years. On the other hand it is evident 
that the sum is ample and that in case of need these charges 
might perhaps be somewhat reduced without affecting the con- 
dition of the road. The items for the several years are as follows : 



Year 


Traffic Density 


Maintenan* 
Way 


:e per Mile 
Equipment 


Total 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


895,614 
981,245 
1,204,698 
1,201,854 
1,103,069 
1,210,611 

1,099,515 ' 


$1,207 
1,042 
1,326 • 
1,580 
1,599 
1,471 

$1,371 


$956 
1,132 
1,301 
1,345 
1,459 
1,450 

$1,273 


$2,163 
2,174 
2,627 
2,925 
" 3,058 
2,921 


Average 


$2,644 


Louis v. & Nash. 
I1L Central 
Chic. & E. Ill . . 


929,594 
1,180,351 - 
1,703,403 


$1,490 
1,386 

867 


$1,537 
1,486 
1,254 


$3,027 
2,872 
2,121 



improvements. 

The expenditures for improvements since the advent of the 
new management have been very heavy. For example the report 
of 1906 states that since 1899 the total tractive power of loco- 
motives in service has been increased 132%; the total capacity 
of freight cars, 145%; and correspondingly large amounts have 
been expended on the roadbed, on new bridges, heavier rails, etc. 
The expenditures on this work alone for the three years ending 
July, 1903, were nearly $13,000,000. The larger part of this work, 
however was paid for by the issue of new securities and not 
from earnings-. 

Surplus Earnings. 

The surplus shown in six years has been as follows : 



- - •. ■ 




Dividends 


Per cent. 




Year 


Surplus 


Paid on 


Earned On 


Average Price 






Preferred 


Common 


(Calendar Years> 


1900-1 


$1,149,742 


I : 4 


■ 1.8 


36 


1901-2 


. 825,341 


- 4 


w 


38 


1902-3 


880,769 


4 


— _ 


37 


1903-4 


1,324,146 


4 


2.7 


27 ' • 


1904-5 


1,602,385 


4 


4.1 . 


40 


1905-6 


1,009,980 


4 


1.1 


37 



174 CHICAGO & ALTON 

The decrease in the surplus in 1906 results from the decline 
of nearly $1,000 per mile in the gross earnings, the reason of 
which has been already stated. 

Dividend Record. 

In former days the Alton was one of the great dividend 
payers, the record for thirty years back standing as follows : 

Year. Preferred. Common. 

1877 7y 2 7y 2 

1878 7 7 

1879 7 6 

1880 7 6y 2 

1881-3 8 yearly 8 yearly 

1884 10 10 

1885-96 8 yearly 8 yearly 

1897 7y A ?y A 

Chicago and Alton Railway 
1901-6 4 

Since the retirement of the old management, and the re- 
organization of the company, the only dividends paid have been 
the 4% to which the preferred is limited. These have been paid 
since 1901 continuously. 

The Balance Sheet. 
At the close of the fiscal year of 1906 the balance sheet 
showed : 

Current assets $2,411,538 

Current liabilities 3,283,941 



Leaving a debit balance of $872,403 

The company, however, held in its treasury $1,000,000 of 
its own bonds, carried on the books at a valuation of $800,000, 
and inasmuch as this item has not been considered in the 
estimate of capitalization, it is not included here. Deducting 
this sum from the amount shown on the balance sheet, as has 
here been done, it will be seen that the company was in need 
of working capital, and that a current credit balance was secured 
only by including these bonds, an item which is not usually 
carried among assets. 



CHICAGO & ALTON 175 

The item of cash amounted to $1,441,263, and the balance 
to the credit of profit and loss was extremely small, amounting 
only to $261,390. 

Investment Value. 

The heavy proportion of fixed charges which must be paid 
out of the total net income of the road leaves but a relatively 
small surplus, the amount shown in 1906 representing less than 
10% of the gross earnings. This is barely sufficient to pay the 
4% on the preferred stock, and leaves nothing at all for the 
common. In the six years under view the preferred dividends 
have practically exhausted all the available surplus, a fact 
which is evidenced by the small amount carried to the credit of 
Profit and Loss. 

It is true that this has been in the face of, and is doubtless 
to some extent the result of, heavy maintenance charges; yet 
it could scarcely be maintained that the Alton's maintenance 
charges could be cut down by a thousand dollars per mile, 
and something like this heavy reduction would have been required 
to justify any dividends on the common stock. 

The heavy increase in fixed charges has practically con- 
sumed all the increase in gross earnings, and at the end of six 
very prosperous years for the rest of the country, the road is 
wkhout any considerable assets in its treasury. Furthermore 
the benefits in the decreased cost of transportation resulting from 
the heavy improvements have been fully offset by the decline in 
the average freight rate. The largest single item of growth 
has been the coal traffic, which is a low grade business. 

At the present time, therefore, the prospects for dividends 
on the common stock do not seem very assuring, and hardly 
sufficient to justify the considerable price at which this stock 
has ruled. Quotations of $47 per share in 1904 were occasioned 
rather by efforts to acquire control of the road than from any 
investment value which the stock might have. The common 
sold as low as $18 per share in 1903, but in 1906 its average 
price was above 30. In March, 1907 it sold at $15. If the hold- 
ings of the Rock Island and affiliated interests are sufficient to 
ensure absolute control, the rest of this stock is worth such a 
figure only to speculators counting upon a manipulative rise. 
On account of the pecular position of the road the quotations for 



176 CHICAGO & ALTON 

the stock are apt to be higher than otherwise they might, so 
that, purchased at somewhere near the low figures of 1907, the 
stock might readily yield a profit to the purchaser who was 
willing to wait for a turn in the market. But there are many 
stocks whose increase in earnings in recent years afford a much 
more solid basis for investment than the Alton. 

As a 4% stock with a six years record, the preferred might 
reasonably sell around $75 per share, with money ruling at 4%. 
In general, the quotations in the last six years have ruled con- 
siderably below this, the stock declining to $60 per share in 
1903, and showing its highest price of $85 per share at the time 
of the Rock Island's heavy purchases in 1904. In 1906 the 
stock reached $80 per share only during the January rise and in 
March, 1907 it sold at $62. Limited to 4%, the stock has no 
further prospects and is of value only for control or as an in- 
vestment. If control is already securely lodged, it is then simply 
a 4% stock, showing a rather meagre margin of safety for its 
dividends. At 1906 rates for money, it was scarcely worth 
1906 prices. 



CHICAGO AND EASTERN ILLINOIS RAILROAD. 

The Chicago & Eastern Illinois is a subsidiary and virtually 
a part of the St. Louis & San Francisco system, which is, in 
turn, a part of the Rock Island System. All of the common 
stock and $6,050,400 of the preferred stock is owned by the St. 
Louis & San Francisco, leaving only $2,780,300 (preferred) of 
the stock of the company in the hands of the public. The road 
is operated separately but has the same general directorate and 
executive committee as the rest of the Rock Island system. 

The road operates a line extending from Chicago to Terre 
Haute and another line from Woodland to Thebes and Joppa in 
Southern Illinois. In 1906 it operated 948 miles. 

Securities outstanding were as follows : 

Capital Stock, 

Common $7,217,800 

Preferred 8,830,700 

Total Stock $16,048,500 

Funded Debt 33,462,000 

Equipment Notes & Bonds 9,832,520 

Total Capital $59,343,020 

Per Mile $62,598 

For the fiscial year of 1906, the road showed : 

Gross Earnings of $9,928,562 

Net Earnings 3,358,073 

Other Income 316,418 

Total Net Income..... 3,674,492 

Fixed Charges 2,529,534 

Six per cent, was paid on the preferred and 8% on the common, 
consuming practically all the surplus income. 

The traffic density and maintenance charges for a period of 
six years compared as follows : 
12 (177) 



178 



CHICAGO & EASTERN ILLINOIS 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


1,275,619 
1,502,253 
1,879,744 
2,046,188 
1,691,214 
1,825,403 


$870 
837 
889 
882 
861 
864 


$ 842 
1,011 
1,158 
1,585 
1,399 
1,533 


$1,712 
1,848 
2,047 
2,467 
2,260 
2,397 


Average . . 


1,703,403 


$ 867 


$1,254 


$2,121 


Chic. & Alton.. 
Ills. Central . . 
Louis. & Nash. 


1,099,515 

1,180,351 

929,594 


$1,371 
1,386 
1,490 


$1,273 
1,486 
1,537 


$2,644 
2,872 
3,02/ 



It will be seen that with a traffic density two-thirds greater 
than the Chicago & Alton or the Illinois Central or the 
Louisville & Nashville, the average maintenance charges on the 
Chicago & Eastern Illinois were from $500 to $900 per mile less. 
While the maintenance charges on the three roads used for 
comparison were undoubtedly very liberal and concealed some 
earnings, yet the difference in traffic density considered, it would 
have seemed as if the charges on the Chicago & Eastern Illinois 
should have been at least equal to those of the Chicago & Alton. 
In other words, the road would have charged itself on the average 
at least $500 per mile more than it did. In all probability, the 
property could hardly have been maintained at the level of the 
other roads without an even greater excess charge. 

The difference of $500 per mile would amount on the average 
to in the neighborhood of half a million dollars per annum. In 
other words, the nominal surplus shown in 1906 would have 
reduced by nearly half, that is to say, it would have almost 
wiped out the amount of surplus available for dividends on the 
common stock. 

In August of 1902, the St. Louis & San Francisco gave in 
exchange for the common and preferred its stock trust certi- 
ficates at the rate of $100 thereof for each $100 share. The 
holding company has the option to retire these trust certificates 
at any time for $250 for each $100 common stock trust certfi- 
cate. In 1905 a majority of the common stock certificates were 
exchanged for these certificates, in denominations of $1,000 
each, representing four shares of common stock and bearing 4% 
interest. 



CHICAGO & EASTERN ILLINOIS 179 

The stock owned by the St. Louis & San Francisco is car- 
ried on its books at a valuation of $18,239,237 for the preferred 
and $9,321,550 for the common. It would seem as if this was an 
enormous over-valuation for these securities. 



CHICAGO AND NORTH WESTERN RAILWAY. 

A very pretty story is told by Frank Spearman in his book, 
"The Strategy of the Railroads," concerning an eastern railway 
engineer out hunting and lost in the wilds of northern Wisconsin, 
who suspicioned that he was not quite right in his senses as he 
broke from a dense forest upon a right of way of double-track 100 
lb. heavy ballasted railway, and saw monstrous trains of cars go 
thundering by. The road in question was the Chicago and North 
Western and nothing can better illustrate its character. 

It holds in the middle west something of the same position 
as the New York Central in the East. It is one of the oldest 
roads west of the Alleghenies, and has behind it a proud record 
of nearly fifty years of fine management and financial success. 

History. 

The beginnings of the North Western, as it is familiarly known, 
go back to 1836, when the Galena and Chicago Union was 
chartered. In 1850 the line from Chicago to Elgin was completed. 
The same people built the Chicago, Milwaukee and Fond du 
Lac. Both companies succumbed in the crash of 1857, and out 
of the wreck came the Chicago and North Western. The line 
had been carried through to the Mississippi in 1855, and to the 
Missouri by 1867. Since then the line has grown steadily, some- 
times by absorption of smaller roads; usually, however, by new 
construction, until in 1906, it embraced a total of 7,453 miles of 
operated road, of which all but about one hundred miles was 
owned outright by the company. It had also 861 miles of addi- 
tional main track. 

Besides this, the North Western owns a working control in 
the Chicago, St. Paul, Minneapolis and Omaha, and the latter 
is a homogeneous part of the system. The 1,683 miles of the 
Omaha bring the total line operated up to 9,116 miles. 

The North Western extends from Chicago westward through 
the rich corn fields of Iowa, and into eastern Nebraska, and 
westerly from Omaha and Sioux City to Caspar in Wyoming, 
and to Deadwood in the Black Hills. Another great trunk line 

(180) 



CHICAGO & NORTH WESTERN 181 

carries the road through southern Minnesota and South Dakota ; 
yet another northward from Chicago through Wisconsin to the 
great iron districts of the Michigan peninsular. The subsidiary 
St. Paul and Omaha line carries the system to Duluth, to Min- 
neapolis and St. Paul, and from thence to Sioux City and Omaha. 
In August, 1906 the directors voted to double the capital 
stock of the road, increasing it to $200,000,000, so that it may 
be assumed that the aggressive policy of the North Western will 
in no ways be changed. 

Ownership. 

Though the North Western does not form a part of the 
New York Central system, it is spoken of always as a Vander- 
bil't line, and the ownership of the road is much the same. 
Whether or not the Vanderbilt interests own the absolute control 
of the stock, it is known they hold always a sufficient number 
of proxies to control the directorate. The latter includes W. K. 
Vanderbilt, F. W. Vanderbilt, H. McK. Twombly, Chauncey M. 
Depew, and Samuel F. Barger, all of the New York Central 
directorate ; and James Stillman, also of the New York Central, 
but representing the Standard Oil interests: Albert Keep, long 
president of the road, and later chairman of the board ; Marvin 
Hughitt, the present president, Chauncey Keep, of Chicago, and 
James C. Fargo, president of the American Express and the 
Merchants Transportation Company. All of these are closely 
associated with the Vanderbilt interests. 

The balance of the board was made up of H. C. Frick, of 
Pittsburgh, and Oliver Ames and David P. Kimball, of Boston, 
Zenas Crane, of Dalton, Mass, Byron L. Smith and Cyrus H. 
McCormick of Chicago, and Frank Work of New York, also a 
director of the Lackawanna. 

Messrs. Frick, Ames, Stillman and Hughitt are also 
directors of the Union Pacific. The executive committee shows 
very clearly the Vanderbilt control of the road. The stock of 
the Northwestern is extensively held, the road reporting to the 
Interstate Commerce Commission 4,109 shareholders in 1905. 

Affiliations. 

As one of the Vanderbilt lines, the North Western is practi- 
ally the westerly end of the New York Central-Lake Shore 
system, and the working connections between these roads are 



182 CHICAGO & NORTH WESTERN 

close. Almost equally close are the North Western's affiliations 
with the Union Pacific, though in this regard it divides with its 
rival, the Chicago, Milwaukee and St. Paul, which has latterly 
shown closer connections with the Union Pacific than formerly. 

Should the Union Pacific gain practical control of the St. 
Paul, the North Western's close connection with the Union 
Pacific might be considerably altered, especially should the North 
Western be extended to the Pacific Coast. 



Capitalization. 

On June 30th, 1906, the capital account of the road stood as 
follows : 

Common stock $75,182,742 

Preferred stock 22,395,120 

Total $97,577,862 

Funded Debt 164,214,000 

Total Capital $261,791,862 

Securities held 37,393,831 

(Inc. Co.'s own stocks & bonds in 
treasury.) 

Approx. net capital $224,398,031 

Approx. net capitalization per mile $30,257 

Miles operated 7,428 

Net earnings on net capital 10.5% 

Stock on net capital 43% 

Fixed Charges on total net income 39% 

Factor of safety 61% 

It will be seen that the capitalization per mile of the North 
Western, as compared with most eastern roads is very low. It 
is, for example, about one-fourth that of the New York Central. 

The capitalization is not only low when reduced to a mile- 
age basis, but also upon the basis of net earnings. The net 
earnings for 1906 showed 10.5% on the estimated net capitaliza- 
tion, which amount is about twice that of the New York Central. 



CHICAGO & NORTH WESTERN 
Equities Owned. 



183 



The only extensive equity held by the North Western lies in 
its interest in the Chicago, St. Paul, Minneapolis and Omaha, 
owning $5,380,000 out of $11,259,911 preferred stock, and $9,- 
320,000 out of $18,558,953 of common stock. This amounts 
practically to absolute control. The $14,700,000 stock is carried 
on the books at $10,000,000. It is paying at the present time 
7% and earning a considerable surplus over and above this sum. 
A solid 7% stock under such conditions, would represent a value 
of around $170 per share, so that this stock holding is readily 
worth two and a half times its book cost and represents an asset 
of perhaps $25,000,000. ! 

The balance of the securities held by the North Western are 
mainly its own stocks and bonds, or those of subsidiary lines. 



Style of Capitalization. 

Even if we deduct from the Funded Debt the total valuation 
of the securities held in the treasury, the bonded debt predomi- 
nates in the capitalization, the stock representing only 43% of 
the estimated net. 

In 1906, Fixed Charges, however, consumed only 39% of the 
total net income, so that the margin of safety was equivalent to 
61%. The amount of the preferred is comparatively not large, 
and the present 7% dividends only consume a little over 6% 
more of the net earnings, so that the margin of safety for the 
preferred was about 55%. 

Increase of Capitalization. 

The items of increase through six years have been as follows : 



Year 


Common 
Stock 


Preferred 

Stock 
(7 per cent.) 


Funded 
Debt 


Total 


Gross 
Earnings 


1899-00 
1905-6 


$41,448,365 
75,182,742 


$22,398,954 
22,395,120 


$137,187,500 
164,214,000 


$201,024,819 
261,791,862 


$42,950,805 
63,481,578 



It will be seen that the common stock has been nearly 
doubled while there has been an increase of nearly thirty million 



184 



CHICAGO & NORTH WESTERN 



dollars in the Funded Debt, the capital increase amounting to 
30%, while the earnings have increased 50%. 

In January of 1907, $24,403 common stock of the $100,000,000 
authorized in 1906, was sold to shareholders at par, to the extent 
of 25% of their holdings, the accruing "rights" selling at $15 to 
$18 per share. 

Character of Traffic. 

The reports of the North Western do not itemize the traffic 
beyond the sources of earnings. For 1906 passenger earnings 
represented 23% of gross, and freight earnings 72%. 

Though generally ranked as chief of the "Grangers," in Wall 
Street parlance, the North Western has a very heavy tonnage of 
iron ore from the Michigan districts; its lumber traffic is also 
considerable, and it has a solid network of railways through the 
populous portions of Northern Illinois, Wisconsin, Iowa and 
southern Minnesota, covering all the important cities of that sec- 
tion, and ensuring it a large merchandise traffic. Its earnings 
therefore in no wise solely depend on the grain traffic. It 
goes without saying, however, that the lines in Iowa, Minnesota, 
Dakota and Nebraska are especially sensitive to the ups and 
downs of agriculture, and that a part of the great prosperity of the 
northwest has been due to the magnificent returns these western 
fields have made in recent years. 



Stability of Earnings. 
The earnings for a period of ten years have shown as follows 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


5,031 

5,031 

5,071 

5,077 

5,219 

5,507 

5,760 

6,332* 

7,404t 

7,408 

7,428 


$33,488,761 
30,977,243 
36,050,561 
38,016,314 
42,950,805 
43,098,587 
46,644,121 
49,842,781 
53,334,634 
55,745,275 
63,481,578 


$6,656 


1896-7 


6,157 


1897-8 


7,109 


1898-9 


7,489 


1899-0 


8,229 


1900-1 


7,826 


1901-2 


8,098 


1902-3 


7,871 


1903-4 


7,203 


1904-5 


7,525 


1905-6 


8,545 







^Includes Fremont, Elkhorn & M. R. R. R. 
{Thirteen months. 



CHICAGO & NORTH WESTERN 185 

It will be seen that the average earnings per mile have in- 
creased scarcely at all since 1900, having reached a figure of 
$8,200 per mile in that year. The mileage earnings have shown 
in several years a considerable decrease from this figure. This is 
due, chiefly, it may be said, to the extension of the road into the 
new territory, and not to any decrease in traffic on the main 
system. It will be seen that the total gross earnings have risen 
steadily, and that especially in 1906 they increased phenomenally. 

Maintenance. 

The amount appropriated for maintenance of way and struc- 
tures in 1906 was $6,864,000. This, reduced to a mileage basis, 
was smaller than at any time within the last six years. It 
amounted to only $924 a mile. This is certainly not high, and 
one will not look for concealed earnings in this item. Neverthe- 
less a large portion of the North Western is local road, not ex- 
posed to the wear and tear of through traffic. Moreover, the 
freight train load of the North Western is considerably lower, for 
example, than that of the Burlington, so that while the outlay on 
this account does not seem very heavy, it was possibly adequate. 

The outlay for equipment showed a heavy increase, amount- 
ing to $9,000,000, against $6,400,000 for the year before, and this 
in its turn was considerably larger than the years preceding. Re- 
duced to a mileage basis, it amounted to $1,215 per mile, against 
$866 per mile for the year before. The report shows that $3,- 
755,000 of this amount went towards the purchase of 78 new 
locomotives, and 4,311 freight cars. This is a considerable item, 
and on many a road would have been charged to capital account. 

Nevertheless, outside of this item, maintenance did not 
amount to more than $1,600 per locomotive, $500 per passenger 
car, and $40 per freight car. These charges look rather low as 
compared with the heavy outlay of many eastern roads, but it 
must be remembered that the traffic density of the North Western 
is not high and that its equipment is correspondingly less expen- 
sive to maintain. 

It is known, moreover, that the North Western is in general a 
well maintained property, and the following table shows that the 
maintainance for the year was well up to the general level of the 
road's policy. 



186 



CHICAGO & NORTH WESTERN 



Year 


Traffic Density 


Maintenance per Mile 
Way Equipment 


Total 


1900-1 
1901-2 
1902-3 
*1903-4 
1904-5 
1905-6 


672,129 
715,701 
636,424 
549,183 
579,434 
694,030 

640,983 
lonths. 
track, 861 miles. 


$1,006 

1,058 

986 

967 

1,008 

924 


$700 
828 
794 
744 
866 

1,215 

$858 


$1,706 
1,886 
1,780 
1,711 
1,874 
2,139 


Average 
♦Thirteen n 
Extra main 


$991 


$1,849 


St. Paul 

Burlington .... 
Rock Island. . . . 


601,003 
580,024 
462,106 


$929 
1,104 
1,022 


$632 

1,032 

759 


$1,561 
2,136 

1,787 



Improvements. 

If, however, these charges represented the total outlay from 
earnings, the North Western would hardly possess the high stand- 
ing which it does. As a matter of fact, in addition to the outlay 
of nearly $16,000,000 for maintenance, an additional $6,000,000 
was set aside in 1906 from earnings for new construction. This 
policy has been pursued consistently by the road for a series of 
years, the items for seven years being as follows: 

1899-0 $4,542,042 

1900-1 4,169,526 

1901-2 4,697,055 

1902-3 5,013,418 

1903-4 4,000,000 

1904-5 4,600,000 

1005-6 6,000,000 



$33,022,041 

This is a considerable sum. It compares, for example, with 
$12,223,185 appropriated from surplus by the St. Paul in the 
same period, and is one of the items that has contributed to the 
greath strength of the road. 



Surplus. 

Over and above its nominal Fixed Charges the road has for 
years earned a surplus amply sufficient to allow for the large ap- 
propriations for improvements noted above, and to pay hand- 



CHICAGO & NORTH WESTERN 



187 



some dividends besides. The surplus for the year of 1906 
amounted to a full 10% on the $22,000,000 of preferred, and 16% 
on the amount of common stock outstanding at the end of the 
year. The preferred stock is entitled to non-cumulative divi- 
dends of 7%, and after the common has received 7% the pre- 
ferred must receive 3% additional ; above 10% both issues share 
alike. In the following table these peculiarities of distribution 
have been disregarded, and the percentage shown as earned on 
the common stock represents the entire amount over and above 
the actual dividends paid on the preferred. They serve to show 
the solidity of the preferred dividend, and indicate clearly, for 
example, that the full ten per cent, might have been paid on the 
preferred, had the appropriations for betterments been less 
liberal. 







Dividends 


Per cent. 


Dividends 


Average 


Year 


Surplus 


on preferred 


earned on 


paid on 


Price 






Stock 


Common 


Common 


Common 


1900-1 


$9,821,287 


7 


21.1 


6 


179 


1901-2 


10,574,826 


8* 


22 


7 


218 


1902-3 


10,389,261 


8 


17.8 


7 


177 


1903-4 


9,399,742 


8 


15.7 


7 


179 


1904-5 


10,417,822 


8 


17.8 


7 


222 


1905-6 


14,800,553 


8 


17.4 


7 


217 



Dividend Record. 

The North Western has a long and enviable record of divi- 
dend disbursements, such as hardly any other western road can 
show. Since the close of the long depression of 1873-77, the 
North Western has steadily paid dividends both on its preferred 
and its common. The record in full is as follows : 

Year. Preferred. Common. 

1876 iy 2 

1S77 sy 2 

1878 7 5 

1879 7 5 

1880 7 6 

1881 7 6 

1882 7}i 7 

1883-4 . ... 8 7 

1885 7y 2 6y 2 

1886-93 ... 7 6 



188 CHICAGO & NORTH WESTERN 



1894.... 


7 


3 


1895.... 


7 


4 


1896-9 . . 


7 


5 


1900-1 . . 


7 


6 


1902.... 


sy 4 


6 and 1% extra 


1903-6 . . 


8 


7 



It will be seen that after the depression following 1893, the 
dividend on the common was cut to 3%, and to 4%, but it is to 
be remembered that it was a period when more than one-quarter 
of the railroad mileage of the country was in the hands of re- 
ceivers. 

Present Conditions. 

The general balance sheet of June 30th, 1906, showed current 
assets : 

Currents assets $23,861,326 

Current liabilities 9,531,401 



Leaving a balance of $14,329,925 

Of the Current assets, $16,830,000 was in cash. 

At the close of the year the balance to the credit of income 
account, as it is styled in the report, that is to say, the credit to 
profit and loss, amounted to $13,956,820, and the land income 
account represented $242,850 additional, making a total of $14,- 
199,671. 

Investment Value. 

Both the common and the preferred of the North Western 
have been among the highest priced stocks on the market. The 
common sold at $271 in 1902, at $249 in January of 1905, and at 
$240 in January of 1906. The preferred sold up to $274 in 1902, 
and $265 in 1905. 

The common sold down to $153 in 1903, and the preferred 
to $190. These same stocks could have been bought as low as $84 
for the common and $128 for the preferred in 1893 ; at the same 
figure for the common as late as 1896. Going yet farther back, 
it is of some interest to note that the common sold at $32 a share 
in 1877, and the preferred at $60 in 1878. 

On the basis of five years payments at 8%, and with a large 
margin of safety, the preferred may be regarded as a solid 8% 
stock with good prospects of an increase in the dividend should 



CHICAGO & NORTH WESTERN 1S9 

prosperity continue. The 7% dividend paid on the common 
through the last five years cannot be increased, as noted above, 
until the full 10% has been paid upon the preferred. But the 
amount of the preferred is not large, and the extra 2% over the 
present rate would require only an additional $446,000 per year. 

From the point of view of railroad finance, no complaint 
could be made if this full dividend were paid. If to the $33,- 
000,000 devoted to improvements in seven years, we add about 
$14,000,000 shown to credit of profit and loss, above all payments 
at the close of the fiscal year of 1906, we have a total of $47,- 
000,000 which represents rather more than half again the amount 
which has been paid out in dividends in the same period ; that is 
to say, for every dollar paid in dividends $1.50 has been put back 
into the property. This is very much better than the traditional 
"dollar for dividends, dollar for improvements," policy. 

It should be understood that the very high prices attained 
in 1902 and 1905 were of a somewhat speculative nature, the first 
being due to the effort made to control the road in the open 
market, and the second to rumors that the control of the road 
was being purchased by the Union Pacific or Harriman interests. 

On the other hand, the bare dividends did not represent the 
full return to the holders of the stocks. North Western "rights" 
have been very valuable and of frequent occurrence. In 1905-6 
these rights amounted to from $18 to $22 per share, and again in 
1906-7 to from $10 to $18. The policy of the road in this regard is 
liberal, and should further issues be made from the stock issues 
authorized in 1906, additional rights would probably accrue to 
the shareholders. 

Under the weight of their repeated issues of rights, the com- 
mon sold down in the Spring of 1907 to $138 per share, with 
rights off, or the equivalent of about $148. This was consider- 
ably below the figures reached in the very moderate recessions of 
1905 and 1906. At something like these figures, it would present 
a fairly attractive investment, even though in case of a heavy 
slump, the stock were to sell lower. There are few solider se- 
curities on the market. The stock is closely held, and the sales 
usually small. The accruing rights would offset the added weight 
of new stocks issued, so that the investor will probably conclude 
that if bought somewhere around the low prices of 1907, that is, 
around $150 a share, it would represent a sound investment. 
Correspondingly, the preferred stock on an 8% basis, with 



100 CHICAGO & NORTH WESTERN 

accruing rights, would be an equally attractive purchase at 
around $200 to $220 per share. 

There are not lacking sound judges to predict very much 
higher prices for these stocks, but on the other hand, it is to be 
remembered that the road rUns through states which are rather 
prone to railroad agitation, and the attempt to pay higher divi- 
dends in the face of less prosperous times might readily bring 
about increased taxation, or hampering legislation which could 
not fail to have its effect upon the earnings of the road and the 
prices of the stock. 



CHICAGO, BURLINGTON AND QUINCY 

RAILROAD. 

The "Burlington," as it is familiarly known, is one of the 
great roads of the interior northwest, operating a huge system 
extending from Chicago in a nearly westerly line through Iowa 
and Nebraska to connections with the Northern Pacific at Bil- 
lings, Montana, with numerous branches carrying the line to St. 
Louis, to Kansas City, to Denver and to St. Paul. 

Its territory is to all intents about the same as that of the 
North Western and the St. Paul. At the date of the 1906 report 
it was operating 8,927 miles, the average for the year being 
slightly below this, and its gross earnings amounted to over 
$74,000,000. 

Formerly one of the independent lines, in 1901 control of the 
Burlington was purchased by the Hill-Morgan interests. For 
legal purposes the road was leased to the Chicago, Burlington 
and Quiney Raihvay, the entire stock of which is held jointly by 
the Great Northern and the Northern Pacific, these two roads 
issuing for the purpose $215,323,200 joint 4% collateral bonds, 
secured by the deposit of nearly all of the original Burlington 
stock. The latter was exchanged for these bonds on the basis 
of $200 per share, and of the $110,000,000 of Burlington stock, 
only about $3,000,000 is still outstanding. The purchase at the 
time was criticised on the ground that the price paid for the 
stock was exhorbitant. Mr. Hill's retort was that before many 
years were passed, the same people would be accusing him of 
having stolen the road. The extraordinary increase in the earn- 
ings of the Burlington in the intervening few years has gone far 
to justify Mr. Hill's prediction, and has certainly justified the 
purchase price paid. 

For the year of 1901, the Burlington's gross earnings were 
$50,000,000, and the surplus shown for that year amounted to 
7.3% on its capital stock. In 1906 the actual surplus of the road 
(a considerable part being concealed in maintenance) was un- 

(191) 



192 CHICAGO, BURLINGTON & QUINCY 

doubtedly above $18,000,000, equivalent to more than 17% on 
the capital stock. It was sufficient to pay the full interest on the 
collateral trust bonds and leave an outstanding equity for the two 
proprietary roads of perhaps four or five million dollars. This 
is certainly a very remarkable showing. 

History. 

The Burlington originated in what was known as the "Cen- 
tral Military Track Railroad Company," chartered in 1851, its 
present name being assumed in 1856. In 1875 the Burlington & 
Missouri River in Iowa was merged into the parent road. The 
Chicago, Burlington and Northern running to St. Paul, and other, 
subsidiary lines were absorbed in 1899, and in 1900, the remain- 
ing leased lines were taken over. 

The line traverses the great corn belt of Iowa and Ne- 
braska, with a perfect network of roads through its especial ter- 
ritory, and its earnings are vitally dependent upon the pros- 
perity of the farms. 

Ownership. 

In 1906 the directorate of the Railway company, the lessee of 
the road, included James J. Hill, then president of the Great 
Northern ; James N. Hill, vice-president of the Northern Pacific ; 
George B. Harris, president, and Darius Miller, vice-president of 
the Burlington railway; Charles E. Perkins, of Burlington, la., 
former president of the road; William P. Clough, fourth vice- 
president and general counsel of the Northern Securities Com- 
pany; Amos T. French, vice-president of the Manhattan Trust 
Company, of New York; John S. Kennedy, vice-president of the 
Northern Securities Company ; and George W. Perkins, of the 
firm of J. P. Morgan and Company, all four directors in the 
Northern Pacific ; Samuel Thorne, of New York, also a director 
of the Great Northern ; and George C. Clark, of New York. 

The directorate of the original railroad company at the date 
of the last report included Robert Bacon, of the firm of J. P. 
Morgan and Company; George F. Baker, president of the First 
National Bank, of New York, also a director in the Northern 
Pacific as well as of the New York Central and other lines; 
George C. Clark, William P. Clough, New York; George B. 
Harris, Chicago; James J. Hill, St. Paul; James N. Hill, New 
York ; John J. Mitchell, president of the Illinois Trust Company, 



CHICAGO, BURLINGTON & QUINCY 193 

Chicago; Charles E. Perkins, Burlington; Samuel Thorne; and 
Norman B. Ream, also a director in the Erie and many other 
roads. 

Capitalization. 

On June 30th, 1906, the capital account stood as follows : 

Capital stock $110,839,100 

Funded debt 174,172,000 

Total Capital $285,011,100 

Securities held (inc. am't with S. F. 

Trust) 25,879,630 

Approximate net capital $259,131,470 

Approx. net capital per mile $29,128 

Average miles operated 8,896 

Net earnings on net capitalization. . 8.7% 

Stock on net capitalization 42% 

Fixed Charges on Total Net Income 45% 

Factor of Safety 55% 

A peculiarity of the Burlington is the large amount held by 
the trustees of sinking funds, which have not been usually con- 
sidered in the capital estimates of other roads because of the 
general smallness of the items. To the close of the fiscal year 
of 1906, the Burlington had paid into its sinking fund nearly 
$26,000,000. Of this amount there were uncancelled bonds' and 
cash awaiting investment held by the trustees of the sinking 
funds amounting to $16,276,242; this latter with "sundry in- 
vestments" of $9,603,387, makes up the item included in Securities 
Held, in the above estimate. 

It will be seen that the approximate capitalization of the 
road is only $29,128 per mile, as against $30,257 for the North 
Western, and $33,922 for the St. Paul. 

The net earnings as given in the report amounted to 8.7% 
on the estimated net capitalization, but the net earnings shown 
were after perhaps five millions of excess maintenance charges, 
so that on a basis of normal maintenance this percentage would 
have been at least 25% higher or nearer 11%. 

Similarly, Fixed Charges in 1906 consumed about 45% of the 
total net income, but this percentage would be very materially 
decreased, on a basis of usual maintenance. The actual Factor 

13 



m 



CHICAGO, BURLINGTON & QUINCY 



of Safety, therefore, for the underlying securities is very much 
higher than the nominal 55% shown. 

The treasury holdings of the Burlington are in the main 
bonds of its own system, in which there is no equity of import- 
ance to the road. 

Increase of Capitalization. 

From 1900, the year before the road came under its present 
ownership, to 1906, the increase of capitalization was as follows : 



1900 
1906 



Stock 



$98,447,500 
110,839,100 



Funded Debt 



$134,174,000 
174,172,000 



Total Cap. 



$232,581,500 
285,311,100 



Gross Earnings 



$47,535,420 
74,146,670 



Increase over six years: Total Capital, 22% ; Gross Earnings, 56%. 

Character of Traffic. 

The Burlington's reports are very meagre and unsatisfactory 
and among other things the road does not itemise the character 
of its traffic. Freight earnings amount to more than two-thirds 
of the total ; and passenger earnings make up less than 25%. 

Stability of Earnings. 

The remarkable increase in the earnings of the Burlington 
through a series of years shows as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896-7 


7,180 


$35,526,186 


$4,947 


1897-8 


7,180 


42,800,162 


5,961 


1898-9 


7,249 


43,389,425 


5,985 


1899-0 


7,546 


47,535,420 


6,286 


1900-1 


7,735 


50,051,989 


6,455 


1901-2 


8,109 


53,795,246 


6,634 


1902-3 


8,391 


62,638,379 


7,465 


1903-4 


8,799 


65,228,192 


7,413 


1904-5 


8,871 


65,973,046 


7,437 


1905-6 


8,896 


74,146,690 


8,335 



It will be seen that in this period the gross earnings have 
more than doubled, and the earnings per mile have increased 
about 70%. 

Maintenance. 

Maintenance charges of the Burlington have habitually been 
very heavy, and have to a considerable extent exceeded those 



CHICAGO, BURLINGTON & QUINCY 195 

of the North Western or the St. Paul. The items through a 
series of years stand as follows: 







Maintenance Der Mile 






Traffic Density 






Total 




Way 


Equipment 




1900-1 


499,229 


$1,119 


$784 


$1,903 


1901-2 


493,502 


960 


916 


1,876 


1902-3 


592,641 


1,084 


907 


1,991 


1903-4 


591,827 


1,107 


952 


2,119 


1904-5 


590,819 


1,025 


1,103 


2,128 


1905-6 


713,568 
580,024 


1,271 
$1,094 


1,533 


2,804 


Average 


$1,032 


$2,126 


North Western. 


640,983 


$ 991 


$858 


$1,849 


St. Paul 


601,003 


929 


632 


1,561 


Rock Island . . . 


462,106 


1,022 


759 


1,781 


Mo. Pac. (2 yrs.) 


623,807 


819 


821 


1,640 



Miles extra track, 525 

It will be seen that the average traffic density for these six 
years was slightly below the North Western or the St. Paul 
while the average expenditures for the Burlington have been 
about $300 per mile more than the North Western and nearly 
$600 over the St. Paul. 

It will be noted, too, that there was an exceptionally heavy 
increase in the maintenance charges for 1906, the average ex- 
penditure of $2,804 per mile for that year for the Burlington 
comparing with $2,139 for the North Western, and $1,661 for the 
St. Paul. 

The maintenance charges are not separately itemized so as 
to permit of analysis, but it is safe to say that normal main- 
tenance is very much more represented by the figures for 1904-5 
than in those of 1906. This difference amounted to between six 
and seven hundred dollars per mile at least. Taken at the lower 
figure, this on the 8,900 miles of road operated, would have meant 
a difference of more than $5,000,000 in the net earnings and in- 
come of the road, and would increase the surplus shown by that 
amount. 

It is to be noted, however, that the Burlington does not set 
aside a special improvement fund, as do most other roads, its 
improvements being charged directly to operating expenses. Thus 
for example, in the seven years to 1906 the total appropriations 
for improvements on the North Western amounted to over $33,- 
000,000, an average of $4,500,000 per year. Here, as elsewhere, it 
will be seen that surplus and earnings are a good deal a matter 



196 



CHICAGO, BURLINGTON & QUINCY 



of bookkeeping and the nominal difference between different 
roads has often little basis in reality. 

Surplus Earnings. 

The nominal surplus shown for six years has stood as 
follows : 



Year 


Surplus 


Surplus after 

all payments 

(Gt. N.-N.P. 

Equity) 


Per Cent. 

Earned on 

Common 


Dividend 

Paid on 

Common 


Average 
Price 


1-900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


$8,125,408 
10,083,011 
13,326,108 
12,814,917 
13,804,778 
12,742,430 


$1,263,389 
4,491,256 
3,980,167 
4,969,925 
3,907,572 


7.3 
9.1 
12.1 
11.6 
12.5 
11.5 


6 

7 
7 
7 
7 
7 


169 
153 
177 
215 

213 



As already noted, if a matter of $5,000,000 maintenance 
exchange were added to the nominal surplus shown in 1906, the 
percentage indicated as actually earned on the common stock 
would have risen more than 40%. 

Dividend Record. 

Like the North Western, the St. Paul, and the Illinois Cen- 
tral, the Burlington has been a steady dividend payer for almost 
its entire history, and since 1873 the smallest dividend paid in 
any year was 4%. The record from 1873 is as follows: 



1873-6 . 
1877... 
1878... 
1879... 
1880. . . 
1881-7 . 
1888... 
1889... 
1890. . . 
1891... 
1892-3 . 
1894. . . 
1895-7 . 
1898... 
1899-01 
1901-6 . 



10 


yearly 


9 




10^ 




8 




9% 


and 20% stock. 


8 


yearly 


5 




4 




5 




4^ 




5 


yearly 


4M 




4 


yearly 


sy 2 




6 


yearly 


7 


(under lease) 



CHICAGO, BURLINGTON & QUINCY 197 

The Balance Sheet. 

The balance sheet shown in the report is entitled "A com- 
posite balance sheet," and is of both the railway and the rail- 
road companies. It is not made up in the usual form, and is 
not overly informing. It showed : 

Cash $14,423,240 

The current liabilities were : 

Unpaid vouchers and payrolls $6,030,905 

Coupon interest 2,344,692 

Sundry accounts balance 1,501,496 

$9,877,093 

Leaving a working balance of $4,546,147 

Great Northern and Northern Pacific Equity. 

Nominally the undistributed surplus remaining after all 
charges, the payment of 7% dividends on the three millions of 
outstanding stock not deposited under the bonds, and the interest 
on the joint collateral bonds, amounted in 1906 to $3,907,572. 
The same item for the years since the purchase of the road by 
the Hill interests are shown in the tables of surplus earnings. 

If, however, $5,300,000 were added to the nominal net surplus 
shown in 1906, the equity remaining for the two proprietary 
roads would be in excess of $9,000,000. It could be conservatively 
estimated at least half this or over $2,000,000 for each road. 

It is understood that the controlling interests in the prop- 
erty have had in mind to transfer the Northern Pacific's holdings 
to the Great Northern. This might be accomplished by the 
retirement of the present collateral trust bonds and the pur- 
chase of the Northern Pacific's equity by the Great Northern. 
The collateral bonds may be retired at 105 and interest, which 
would require a total of about $226,000,000. 

It is estimated that perhaps $20,000,000 has been earned by 
the Burlington since the purchase and turned back into the road 
for new equipment, etc. It is evident that if the equity of 
either road amounted to no more than half the estimated amount 
which this would represent in 1906, the value of this equity 
would still be considerable. If the half of this equity were 
estimated as worth no more than $2,000,000, and this were 
capitalized at say 7%, the value of the equity to either road would 



198 CHICAGO, BURLINGTON & QUINCY 

be worth in the neighborhood of from $20,000,000 to $30,000,000; 
and should the Burlington's earnings continue to increase at 
the same rate as in the last ten years, this value would certainly 
be higher. 

It is probable that $20,000,000 would not be an excessive 
estimate as to the actual profit which the purchase of the Bur- 
lington represents to either road to date. The transaction is 
one of the most remarkable in American railroad annals and is 
only equalled by the extraordinary rise in the value of the North- 
ern Pacific stock purchased by the Union Pacific prior to the 
formation of the Northern Securities Company. 

In the event of the purchase of the Northern Pacific's inter- 
est in the Burlington, the latter would probably pass directly 
under Hill management, and might be leased to the Great North- 
ern. This would give the Great Northern a through line to 
Chicago (which it now practically enjoys) and the extension of 
the Burlington from Billings, Montana, to Great Falls or some 
point on the Great Northern line would provide a second through 
route for the Great Northern from Chicago to the Pacific Coast. 

The outstanding amount of the old Burlington stock appears 
but seldom on the exchanges. Quotations since the purchase 
have ranged from a low point of $170 in 1903 to a high point of 
$250 in 1904. In 1906 the price ranged between $207 and $220. 
A considerable premium might be offered for the retirement of 
this stock, though any impelling reason for this seems slight. 
Barring this vague possibility, it is a stock with no other pro- 
spects than of earning its solid 7% ; and is worth what any one 
wishes to pay for a gilt-edge security on that basis, and no 
more. 



CHICAGO GREAT WESTERN RAILWAY. 

The Chicago Great Western somewhat belies its name in that 
it is rather one of the minor roads reaching westward from Chicago 
to Omaha, with branches to St. Paul and Minneapolis towards the 
north, and to Kansas City towards the south. It is absolutely inde- 
pendent, being owned chiefly in England, and it has been a thorn in 
the flesh of middle western railroads by its free tendency to rate- 
cutting. 

The Great Western represents a reorganization and change of 
name of the Chicago, St. Paul and Kansas City Railway, which 
operated a line spreading out like a three-cornered star from Oel- 
wein, in northeastern Iowa, to St. Paul, Chicago and Kansas City. 
In 1901 a syndicate was formed to acquire the Mason City and Fort 
Dodge Railroad in the interest of the Great Western, and this small 
line was extended so as to join the Great Western, and also con- 
tinued southwest from Fort Dodge to Council Bluffs, 133 miles. 
To this line, in 1904, the Great Western transferred 89 miles of road, 
which accounts for the reduction in the mileage of the road nomi- 
nally operated by the Great Western. All the stock of the Mason 
City and Fort Dodge is owned by the Great Western, though the 
road reports separately. 

Another subsidiary company is known as the Wisconsin, Minne- 
sota and Pacific Railroad, operating a line from Mankato to Red 
Wing, in Minnesota, and thence to Winona, and to Osage, in Iowa. 
Its stock is entirely owned by the Great Western, and these three 
roads make up what is known as the Great Western System with the 
following mileage and earnings : 

Mileage. Gross Earnings. Net Earnings. 

Chicago Great Western 818 $8,573,148 $2,755,492 

Mason City & Fort Dodge . . 378 1,863,455 719,476 

Wis., Minn. & Pacific 271 711,082 348,763 



Totals 1,467 $11,147,685 $3,823,732 

The Chicago Great Western is in more senses than one sui 
generis, and has practically no affiliations with other roads. It, 

(199) 



200 CHICAGO GREAT WESTERN 

therefore, shares no advantages of any community of interest ar- 
rangements, and has been conducted as a thorough free lance. 

Ownership. 

The Great Western is almost entirely the creation of its presi- 
dent, Alpheus B. Stickney, of St. Paul, who despite the peculiarities 
of capitalization and policy of his road, is regarded as one of the 
ablest and most aggressive of western railroad managers; and he 
has been able to win and hold, in a singular degree, the confidence of 
the British shareholders, who are the main owners of the road's 
securities. 

The directorate of the road includes President Stickney, Ansel 
Oppenheim, vice-president; Sam C. Stickney, vice-president and 
general manager ; Frederick Weyerhaeuser, one of the lumber kings 
of the northwest ; J. W. Lusk, R. C. Wright and M. D. Flower, all 
of St. Paul; T. H. Wheeler, vice-president of the National Storage 
Company, New York, and H. E. Fletcher, of Minneapolis. Mr. 
Weyerhaeuser is also a director in the Great Northern and other 
roads, but this implies no special affiliations. 

Aside from the directorate, there is an English Finance Com- 
mittee, made up of Howard Gilliat, chairman ; Alexander F. Wallace, 
Edwin Waterhouse, and Sir Charles Tennant, Bart., all of London. 

Capitalization. 

On June 30th, 1906, the capital account of the road stood as 
follows : 

Common stock $44,464,545 

5% Preferred stock "A" 11,336,900 

4% Preferred stock "B" 23,103,842 

Total $78,905,287 

Funded Debt : 

4% Debenture stock $26,127,089 

5% Gold notes 8,473,060 

5% Equipment warrants 272,271 

Total $34,872,420 

Nominal capital $113,777,707 

Rentals capit. at 4% 10,250,000 



Approx. gross capitalization. . .$124,027,707 



CHICAGO GREAT WESTERN 201 

Securities held 39,216,754 

Approx. net capitalization $84,800,953 

Approx. net capitalization per mile. . $103,668 

Miles operated 818 

Net earnings on net capital 3.0% 

Stock on net capital 92% 

Fixed Charges on total net income. . 67% 

Factor of Safety 33% 

It will be seen from the above that the road is enormously over- 
capitalized, its figure of $105,400 per mile here estimated, standing 
against a similar figure of $30,250 per mile for the Chicago and 
North Western, and $33,900 per mile for the St. Paul, two of the 
great railway systems of the country. 

The net earnings of the Great Western represent only 3.0% on 
the estimated net capitalization, as against 10.5% for the Chicago 
and North Western, 9.7% for the St. Paul. 

It should here be explained that in the make-up of its report, 
the Chicago Great Western includes in its gross earnings, $227,000 
of surplus earnings of its subsidiary lines. This item legitimately 
belongs under Other Income, and does not represent a part of the 
Gross Earnings of the Great Western's own line. It has, therefore, 
been deducted from the net earnings shown in the report, in conse- 
quence of which the net earnings become $2,520,000 instead of $2,- 
755,000, as shown in the report. 

It is also to be noted that this same item of surplus earnings 
is counted twice in the table of earnings of the Great Western system 
given above, from the printed report of the company ; and the 
figures given for the system are to the same extent misleading. 

Style of Capitalization. 

The over-capitalization, however, is wholly represented by stock, 
so that it really does no harm save, perchance, to the unreflecting 
investor. From the tabulation given above it will be seen that three 
classes of stock constitute 92% of the net estimated capitalization. 
On the $44,000,000 of common stock no dividends whatever have 
ever been paid, and none as yet on the preferred "B" stock, so that 
this $67,000,000 of stock, more than four-fifths of the total, repre- 
sents merely potentialities. 

More than this the company has no mortgage debt, the place 
of the usual bonded indebtedness being taken, after the English 



202 



CHICAGO GREAT WESTERN 



fashion, by 4% debenture stock. The interest on this debenture 
stock is cumulative, but if it is defaulted the road cannot be thrown 
into the hands of a receiver. The interest simply becomes a charge 
against future earnings. 

In addition to this debenture stock, the company had outstand- 
ing about eight and a half millions of gold notes, of which $48,000 
is due in 1906; $117,000 in. 1907; $3,342,000 in 1908 ; $4,069,000 in 
1909, and the balance in the succeeding two years. In the estimate 
of Fixed Charges, the four per cent, paid on the Debentures has 
been included, but the payments due on the gold notes have not. 
Estimated in this wise, the Fixed Charges for 1906 consumed 67% 
of the Total Net Income, the $227,000 of surplus from the subsidiary 
lines being included in the latter. In this sense the Factor of Safety 
on the Debenture stock, rental obligations and so forth, becomes 
33%. It should be borne in mind, however, that the debenture stock 
is a lien and not a mortgage, and that the debenture holders could 
not seize the road in case of defaulted interest. 



Increase of Capitalization. 

The change in the capital account in six years was as follows : 



YEAR 


Common 
Stock 


Preferred 
Stock 

"A" 11,303,900 
"B" 7,468,090 
"A" 11,336,900 
"B" 23,103,842 


Debenture 
Stock and 
Car Trusts 

$17,990,054 
34,873,420 


Total 


Gross 
Earnings 


1899-00 
1905-06 


$21,308,145 
44,464,545 


$58,070,189 
113,777,707 


$6,721,037 
8,573,141 



Increase over six years : Nominal capital, 96% ; gross earn- 
ings, 27%. 

It will be seen that while the gross earnings have increased but 
slightly, the capitalization of the company has been more than 
doubled. A part of this large outpour of securities is offset by 
the purchase or exchange of the securities of subsidiary lines, but 
even when the latter have been deducted, it will be seen that the 
new issues of capital were hugely in excess of the increased 
earnings shown. 



lows: 



Equities Owned. 
The chief holdings of the Chicago Great Western are as fol- 



CHICAGO GREAT WESTERN 203 

Mason City and Fort Dodge 

common stock $19,205,400 

preferred stock 13,635,752 

Wis., Minn. & Pacific stock 5,893,400 

Total $38,734,552 

Under the terms of the agreement with the Mason City and 
Fort Dodge company, any surplus which remains after the payment 
of interest on the bonds, and dividend of 4% on the preferred stock, 
is to be held in trust by the parent company as a guarantee against 
the payment of future coupons. By the agreement with the Wis., 
Minn, and Pacific, all the earnings above 4% on the bonds go to 
the parent company. In 1906 a surplus of $137,196 was shown on 
the Mason City and Fort Dodge, but no payments were made upon 
the preferred stock. The cumulative surplus amounted on June 30, 
1906, to $1,062,975. 

The surplus shown by the Wis., Minn, and Pacific for the same 
year was $90,234, and the cumulative surplus $445,845. The year's 
surplus shown by these two companies amounted to $227,431, and 
was turned over to the parent company and included in the gross 
earnings of the latter, as already noted. 

It will be seen that if this item of subsidiary surplus were 
taken as the return upon the $38,000,000 of stock held by the parent 
company, the interest so derived would be extremely small, less 
than 1%. As a matter of fact it simply goes to a guarantee fund. 
The Great Western's other holdings are very slight. The mainte- 
nance charges of the subsidiary roads were extremely light, 
amounting to only $371 per mile for maintenance upon the Mason 
City and Fort Dodge. It may be taken, therefore, that the Great 
Western's $38,000,000 of securities owned is simply a vague po- 
tentiality, and at the present time represents no very valuable asset. 

Character of Traffic. 

The report of the company does not itemize its tonnage, but the 
latter is known to be of a highly miscellaneous sort, so that the pros- 
perity of the road depends simply upon that of the territory through 
which it runs and not upon any single industry. Its main item is 
undoubtedly grain. The earnings from freight were nearly $6,- 
000,000 ; from passengers, nearly $2,000,000 ; and from other sources 
very small. 



204 



CHICAGO GREAT WESTERN 
Stability of Traffic. 



Despite its peculiar position among Western railroads, the 
mileage earnings of the Great Western have risen steadily from 
$5,000 per mile in 1896-7 to $10,400 per mile in 1906; that is to say, 
they have about doubled. This is, for example, a much heavier 
increase per mile than the Chicago and North Western, which rose 
only from $6,600 to $8,500 in the same period. The company's 
business has been built up in the face of solidly entrenched rivals, 
so that this remarkable increase speaks excellently for the 'manage- 
ment of the road. It shows that the weakness of its securities lies 
not in management nor in earnings, but in the heavy burden of over- 
capitalization. 



YEAR 



1895-6 
1896-7 
1897-8 
1898-9 
1899-0 
1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



Miles Operated 



Gross Earnings 



927 


$4,709,821 


928 


4,680,860 


930 


5,386,044 


930 


5,867,739 


930 


6,721,037 


930 


7,013,862 


930 


7,549,689 


930 


7,823,191 


874 


8,022,674 


818 


7,377,711 


818 


8,573,141 



Per Mile 



$5,080 
5,044 
5,791 
6,309 
7,227 
7,541 
8,118 
8,412 
9,179 
9,015 

10,476 



Maintenance. 



The maintenance charges on the Great Western have been 
fairly heavy, as compared with its competitors in the same field, 
amounting in 1906 to $2,095 per mile, as against $2,139 per mile 
for the Chicago and North Western, which is considered one of the 
best managed roads in the country. It should be remembered, how- 
ever, the latter has a considerable item of extra track while the 
Great Western has not. On the other hand, the Traffic Density of 
the Great Western is about half again as much as the North West- 
ern. It is fair to assume that there are no concealed earnings in- 
cluded in the Great Western's maintenance account. The items for 
six years were as follows ; 



CHICAGO GREAT WESTERN 



205 



\^PAV 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


896,558 
865,175 
817,545 
921,309 
885,028 
1,065,647 

908,545 


$999 

1,031 

985 

990 

889 
894 


$704 
812 
1,005 
1,170 
1,105 
1,201 

$999 


$1,703 
1,843 
1,990 
2,160 
1,994 
2,095 


Average 


$964 


$1,963 






Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 


C. & N. W... 

C. M. & St. P. . 
Burlington. . . . 


640,983 
601,003 
580,024 


$991 

929 

1,104 

- 


$858 

632 

1,032 


$1,849 
1,561 
2,136 



Improvements. 

On the other hand, while the North Western and other lines 
in the same field have turned back into the improvement of the road 
large sums from the surplus, nothing of this sort is shown by the 
Great Western. The report for 1906 shows improvements to the 
amount of $959,163, but if this sum has been drawn from the earn- 
ings and not charged to capital account, this favorable fact is not 
mentioned. 

Surplus Earnings. 

The items of surplus for the same six years over and above the 
Fixed Charges and the payments on the 4% debenture stock, have 
been as follows : 



Year 


Surplus 


Dividends on 

Preferred 

Stock "A" 


Per cent. 
Earned on 
Common Stock 


Average 
Price of 
Common 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


$559,513 
589,645 
576,241 
142,663 
191,400 
695,326 


5 
5 
5 
5 

5* 





16 
24 
21 
19 
19 
24 



* See below. 



206 CHICAGO GREAT WESTERN 

Only one semi-annual payment was made on the preferred "A" 
in the fiscal year of 1906, though another payment charged to the 
year's earnings was made on October 1st. 

It will be seen that in the years of 1904-5 the items of surplus 
showed a considerable drop, so that in 1905 the dividend on the 
preferred stock "A" had to be suspended. 

The surplus for 1906 amounted to a full 5% on the preferred 
"A," and the balance represented about half of one per cent, on the 
$23,000,000 of preferred "B." 

The Balance Sheet. 

The balance sheet of June 30th, 1906, showed : 

Supplies and accounts receivable $2,068,259 

Cash in hand 628,206 

Total $2,696,565 

Accounts payable . 1,842,795 

Rentals and interest not yet due 234,886 

Total $2,077,681 

leaving a balance of $618,884. 

On the 4% debentures there was interest, due July 15th, 1906, 
amounting to $522,490. 

Investment Value. 

The 4% cumulative debenture stock, in the last four years, has 
ruled between $80 and $90 per share. At $83, the average price 
for 1906, the return to the investor is about 4^4%. 

While the interest on this stock has been paid regularly through 
a series of years, it is evident from the record that the surplus over 
and above this payment has often fallen perilously near to zero, and 
that the interest has been paid only through very careful and eco- 
nomical management. It follows, therefore, that while the nominal 
Factor of Safety in 1906 amounted to 33%, it was very near nothing 
the two years preceding. An investment in this stock, therefore, 
cannot be said to possess any high degree of security. 

On the other hand it is likely that through the operation of the 
new railroad laws, conditions will tend to become more stable, 
and, barring a very heavy setback of prosperity, the company 
should be able to maintain its payments on this stock. A rather 
speculative security, yielding less than 5%, can hardly be re- 
garded as overly attractive. 



CHICAGO GREAT WESTERN 207 

The quotations on the preferred "A" stock rose to $90 per share 
in 1901-2 but fell to $47 in 1904, rising again to above $80 a share 
in 1906 and declining to $50 in April of 1907. If the security on 
the debenture stock is not very great, it follows that the security 
on the preferred "A" is still less. At $65 per share, the full 5% 
would yield the investor 7.7%, which is none too high, consider- 
ing its speculative nature. It can scarcely be considered very 
attractive to cautious investors at anything above this figure. If 
the prosperity of the road should continue, the value of this stock 
may be somewhat enhanced, but not a great deal, since the divi- 
dend is limited and not cumulative. 

Nothing has ever been paid on the $23,000,000 of the preferred 
"B" stock, and little or nothing has ever been earned. In order to 
pay a full 4% dividend on this stock, the surplus shown in 1906 
would have to be more than doubled, and the surplus in 1906 was 
the largest the road has ever shown. It follows, therefore, that this 
stock has only a nominal value, and represents simply possibilities. 
The price was run up to $56 in the boom year of 1901 ; it fell as low 
as $20 per share in 1904. It represents a pure speculation. If pur- 
chased at its low price of 1907 of $15 per share, and held for a 
number of years, it might yield the investor a good return, but 
this would be only contingent upon the undiminished prosperity of 
the road, which would, in turn, depend upon the prosperity of the 
middle west. 

If the twenty-three millions of preferred "B" is at the present 
time of only speculative value, it is difficult to see that the forty-four 
millions of common stock has any value at all. The 4% on the 
preferred "B" would require eight or nine hundred thousand dol- 
lars additional in surplus earnings above the $695,000 shown in 
1906. Even a one per cent, dividend on the common stock would 
require $440,000 more, making a sum nearly three times the highest 
surplus the road has yet earned. 

In view of this fact it is evident that quotations of $35 per share 
shown in 1902 had but one possible basis. This is the idea long en- 
tertained that the Great Western would be "bought up" by some one 
of its big rivals. 

The necessity, though not perhaps the probability of such a 
purchase has been very considerably diminished by the passage 
of the new Rate Bill and it is notable that the highest price 
touched by the stock, even in the high prices of 1906, was $23 per 



208 CHICAGO GREAT WESTERN 

share. In June, 1906, the price had fallen to $16. It was $10 per 
share in May, 1907. 

It is a stock which will probably fluctuate between rather wide 
extremes. Anyone who could put it away when the market in 
general had fallen to a very low level, would probably be able to 
dispose of his holding at a handsome increase when the market had 
grown up again. As to what would represent a low figure it is not 
easy to determine. If, when the market is at top levels, the price 
ruled around $18 a share, it is likely that with a heavy general 
slump, it would be somewhere around or below the low price of 1907. 

The low quotations of May, 1907, were reached following 
the publication of the report of the Sundberg Investigating Com- 
mittee of the Minnesota State Legislature, which severely criti- 
cised the capitalization of Minnesota railroads and especially of 
the Great Western. This was a part of the revived "granger" 
agitation which swept the western states in the winter of 1906-7. 



CHICAGO, INDIANA AND SOUTHERN 
RAILROAD. 

The Chicago, Indiana & Southern Railroad was organized 
in 1906 as a consolidation of the Indiana, Illinois & Iowa and 
the Indiana Harbor Railroad companies. At the time of the 
reorganization it acquired the entire capital stock of the Dan- 
ville & Indiana Harbor Railroad. The company operates two 
lines, one extending from Indiana Harbor on Lake Michigan 
due south to Danville, Illinois, the other at right angles to this 
from South Bend, Indiana to Churchill in the Spring Valley coal 
fields of Illinois. 

Jan 1, 1907, the company had outstanding: 

Common stock $15,000,000 

Preferred 5,000,000 

50-year 4% gold bonds 10,000,000 

I. I. & I. first mtge. bonds 4,850,000 

Total $34,850,000 

The Lake Shore in 1906 owned all of the preferred and 
$12,000,000 of the common and in addition $7,000,000 of the first 
mortgage bonds. The balance of the common stock ($3,000,000) 
was owned by the Michigan Central. 

For the fiscal year of 1906 the company showed 

Gross earnings $2,332,731 

Net earnings 480,923 

Total net income 513,172 

Fixed Charges 254,868 

Surplus 258,304 

The surplus shown was about double the surplus earnings 
of the constituent roads of the year previous, after somewhat 
increased maintenance charges. Fixed charges of 1906 were 
50% of the total income and the balance remaining was suffi- 
cient to pay the 4% cumulative dividend on the preferred. 

The road may be classed as a tributary to the Lake Shore 
and its chief officials are the same as those of the New York 
Central-Lake Shore system. 

!* (209) 



CHICAGO, INDIANAPOLIS AND LOUISVILLE 

RAILWAY. 

(The Monon) 

The Chicago, Indianapolis and Louisville, more generally known 
as the "Monon," from a town in Indiana, is a road leading southward 
from Chicago and from Michigan City, on Lake Michigan, through 
Indiana to Indianapolis and Louisville. It is jointly owned by the 
Louisville and Nashville and the Southern Railway, having been 
purchased for the purpose of providing a through route for these 
roads to Chicago. It is the old Louisville, New Albany and 
Chicago, which was sold under foreclosure in 1897. 

The Chicago and Western Indiana, whose stock is owned by the 
Monon, is operated under a 999 years lease, which gives the Monon 
entrance into Chicago. The Monon owns also a one-third interest 
in the Kentucky and Indiana bridge at Louisville. It operates a 
total of 592 miles, chiefly in western Indiana. 

Ownership. 

In 1902 the Louisville and- Nashville, with the Southern Rail- 
way, acquired 92y 2 % of the common stock, and 77°/o of the pre- 
ferred stock, on a basis of $78 a share for the common, and $90 a 
share for the preferred. The two roads issued for this purchase, 
fifty-year 4% collateral trust gold bonds, secured by the stock so 
acquired. 

Management. 

The officers of the road are William H. McDoel, president, 
Chicago; Morton F. Plant, vice-president, New York. The direc- 
torate includes Temple Bowdoin, Thomas W. Joyce, R. M. Galla- 
way, Charles Steele, Morton F. Plant, A. H. Gillard and Amos T. 
French, New York; William H. McDoel, Gilbert B. Shaw, E. C. 
Field, Chicago, and James Murdock, Lafayette, Ind. These are 
chiefly representatives of the two controlling roads. 

(210) 



CHICAGO, INDIANAPOLIS & LOUISVILLE 21 i 

Capitalization. 

Common stock $10,500,000 

Preferred stock 5,000,000 

Total stock $15,500,000 

Funded debt 14,942,000 

Nominal capital $30,442,000 

Rentals eapit. at 4% 6,370,000 

Approx. gross capitalization $36,812,000 

Securities held 2,702,165 

Approx. net capitalization $34,109,835 

Approx. net capitalization per mile. . $57,618 

Average miles operated 592 

Net earnings on net capitalization . . . 6.4% 

Stock on net capitalization 45% 

Fixed Charges on Total Net Income 50% 

Factor of Safety 50% 

Earnings and Dividends. 

Of the earnings of the road, passenger traffic yielded 25% 
and of the freight traffic the largest single item was products of 
mines, 44%, of which bituminous coal formed 12%, and stone, 
sand and like articles, 27%. 

The earnings of the road have increased steadily from $2,- 
902,000 in 1896-7, to $5,921,000 in 1906. The road showed a de- 
ficit in the second year of its reorganization. Since then, that is 
from 1898, it has shown a steadily increasing surplus which 
amounted to $1,197,636 in 1906. This was equivalent to 4% on 
the preferred and 9.5% on the common. 

Dividends of 4%, to which the preferred is limited, have been 
paid since 1900. Dividends of 3% on the common were paid in 
1905 and 1906, payments being semi-annual. 

Maintenance has apparently been quite adequate, amounting 
to nearly $2,700 per mile in 1906. The credit to profit and loss 
at the close of the fiscal year of 1906, was $4,647,437. 

Investment Value. 
Since the road is so largely owned by the two roads dividing 
the controlling interest, the floating supply of the stock has no 



212 CHICAGO, INDIANAPOLIS & LOUISVILLE 

other value save as an investment. The stock is very little 
traded in on the market. Since the preferred is limited to 4%, 
its value may be estimated at from $70 to $90 per share; that is 
to say, at the price of a fairly solid 4% stock. 

The common may readily receive larger dividends than it 
does, earning upwards of 9%. 

As the northern outlet of the two important 'systems, the 
earnings should steadily increase as in the past ten years, and 
if no recession in business occurs, the stock might readily be put 
on a 5 or 6% basis. It has not been quoted on the ex- 
change for some years. On a 3% basis, with prospects of an in- 
crease, it might readily sell at $60 or $80 per share or more. The 
stock is comfortably earning a 5% dividend, and if placed on this 
basis eventually would be worth above $100 per share. 

The undistributed equity of the two controlling roads 
amounted in 1906 to upwards of half a million dollars. 



CHICAGO, MILWAUKEE AND ST. PAUL 

RAILWAY. 

"St. Paul" as it is known in Street parlance, maintains in 
almost every notable characteristic a strict parallel with the 
North Western. The two roads occupy almost identically the 
same territory, both are among the best managed roads of the 
country ; the securities of both have long been prized by inves- 
tors. There is this difference, however, that whereas the North 
Western is distinctly one of the Vanderbilt lines, the St. Paul 
has maintained a position of exceptional independence. Lat- 
terly, however, it has seemed to draw into closer affiliations with 
the Union Pacific and the interests dominant in the two roads 
are known to have very close relations. 

Recently the St. Paul has come into special prominence 
through its announced intention to extend its line to the Pacific 
coast. In spite of the fact that this intention has been officially 
announced and a considerable part of the extension contracted 
for, the report of 1906 contained not a word upon the subject. 

History. 

The old Milwaukee and St. Paul Railroad was organized in 
war times, when it was an open question as to whether Chicago 
or Milwaukee would be the chief port of Lake Michigan. The 
aim of the company was to extend the road into Minnesota and 
the Dakotas, and to develop these regions, then a wilderness. 
St. Paul at the time was an obscure hamlet and Minneapolis was 
unknown. The purchase of the St. Paul and Chicago, effected 
after the organization, gave the road a through line from Mil- 
waukee to St. Paul, and in 1874 the extension from Milwaukee 
to Chicago completed a continuous road between Chicago and 
the Minnesota capital. 

Since then the road has been steadily extended through 
Iowa, Minnesota, and into the Dakotas, according to the original 
intention. The absorption of the Milwaukee and Northern car- 

(213) 



214 CHICAGO, MILWAUKEE & ST. PAUL 

ried the road into the iron districts of peninsular Michigan, and 
through other extensions it reaches to Omaha and to Kansas 
City on the south, to Fargo and other points in North Dakota on 
the north. The total operated mileage in 1906 was 6,961, almost 
the entire length of which was owned by the company outright. 
The extensions of the line westward from Chamberlain, South 
Dakota, now under way will carry the line to Rapid City in the 
Black Hills ; and the 800 miles of the Pacific Coast extension 
on which construction was begun from Evarts, on the Missouri 
River, would reach into Montana. The company is said to own 
valuable terminals in Tacoma and Seattle, on Puget Sound. 

Ownership. 

The St. Paul had never, until latterly, been under the domi- 
nation of any single interest, and the stock is widely held. In 
1905, the company reported 5,832 stockholders. It is evident, 
however, that by 1906 Standard Oil interests had obtained prac- 
tical control; it is certain that in conjunction with representa- 
tives of the George Smith Estate, this control is absolute. 

In the directorate, Standard Oil interests are directly repre- 
sented by William Rockefeller, Henry H. Rogers and Charles W. 
Harkness. Peter Geddes and Herman Le Roy represent 
their own holdings and those of the Smith estate. In 1906, Mr. 
Smith's place on the board was taken by his business representa- 
tive, Herman S. Le Roy, a New York attorney. The other di- 
rectors were Roswell Miller, chairman of the board ; A. J. Earling, 
president; Frank S. Bond, former vice president; John A. Stew- 
art ; Joseph Milbank, of New York ; J. Ogden Armour, Chicago ; 
Frederick Layton, Milwaukee; Messrs. Rogers and Earling are 
also in the directorate of the Union Pacific, and in close affilia- 
tion with them is William G. Rockefeller, also a director, and son- 
of William Rockefeller. William Rockefeller is well-known as a 
prominent director in the New York Central system, the Dela- 
ware and Lackawanna and other roads. John A. Stewart is 
chairman of the Board of Directors of the United States Trust 
Company, in which Standard Oil interests are prominently rep-, 
resented. Joseph Milbank is a capitalist, and legatee of the Mil- 
bank estate. J. Ogden Armour is the present head of the exten- 
sive Armour interests of Chicago, and Frederick Layton is a 
prominent capitalist of Milwaukee. 



CHICAGO, MILWAUKEE & ST. PAUL 215 

In the executive committee Standard Oil interests predomi- 
nate. 

Beyond its close connection with the Union Pacific, the St. 
Paul has no especial affiliations, and it is not a holding company, 
having practically no interests in other roads. 

Capitalization. 

On June 30th, 1906, the capital account stood as follows : 

Common stock $58,183,900 

Preferred stock 49,654,400 

Total stock $107,838,300 

Funded debt 121,849,500 

Nominal capital $229,687,800 

Rentals capit. at 4% 10,525,000 

Approximate gross capitalization. $240,2 12,800 
Unsold bonds in treasury 4,077,000 

Approx. net capitalization $236,135,800 

Approx. net capital per mile $33,922 

Average miles operated 6,961 

Net earnings on net capitaliation. . 9.7% 

Stock on net capitalization 45% 

Fixed Charges on Total Net Income 32% 

Factor of Safety 68% 

The rentals paid are small, adding but little to the estimated 
capitalization of the company. On the other hand the company 
has no securities of other roads, and the gross capitalization is 
to be reduced only by the amount of unsold bonds held in the 
treasury. 

It will be seen that the average capitalization per mile is 
very low, and as far back as 1901, President Miller stated in his 
annual report that the road could not be duplicated for its then 
existing capitalization, which was about the same per mile as 
now. Its $33,922 of capital per mile compares with $30,252, for 
the Chicago and North Western. The capitalization of the road 



216 



CHICAGO, MILWAUKEE & ST. PAUL 



as determined by earnings is about the same, the 9.7% for the St. 
Paul comparing with 10.5% for the Northwestern. 

On June 30, 1906, the stock of the road represented 45% 
of the estimated net capitalization, as compared with 43% for 
the North Western. The Fixed Charges consumed 32% of the 
Total Net Income, as compared with 39% for the North Western. 
The Factor of Safety on its securities for the St. Paul therefore 
was slightly higher than that of its chief rival. 

As already stated, the St. Paul has no equities in other com- 
panies. 

Increase of Capitalization. 

In the six years from 1900, the capital and earnings of the 
St. Paul increased as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1899-00 
1905-06 


$47,146,600 
58,183,900 


$40,454,900 
49,654,400 


$122,256,000 
121,849,500 


$209,857,500 
229,687,800 


$41,884,692 
55,423,052 



Net increase over six years : Nominal capital, 10% ; gross 
earnings, 32%. 

In 1906, $24,802,809 of new common stock was sold to share- 
holders at par, to the extent of 23% of their holdings, the result- 
ing rights therefrom averaging from $15 to $18 per share. Again 
towards the close of the year $33,164,300 new common stock and 
$66,328,600 new preferred were offered to the shareholders at 
par, to the extent of 25 and 50%, respectively, of their total hold- 
ings, accruing rights on this issue selling at from $31 to $35 per 
share. 

The result of these issues was to increase the amount of 
common stock from $58,000,000 to $115,000,000, and the pre- 
ferred from a little under $50,000,000 to the same as the com- 
mon. Payments, however, on the latter issue were distributed over a 
period of two years and more so that while interest would be 
paid on the amount of the subscriptions, the road would not 
meet full dividends on this new stock until 1909. 

Character of Traffic. 

The St. Paul is one of the great "grangers," and farm pro- 
ducts make up the chief items of its tonnage. Products of the 



CHICAGO, MILWAUKEE & ST. PAUL 



217 



latter in 1906 represented 23%, and of animals, 6.3%, or a total 
of nearly 30%. Products of mines made up 28.5%, of which the 
chief item was bituminous coal. Lumber made up 14%, manu- 
factures and miscellaneous the balance. This is a wide and very- 
even distribution of traffic, and means that the prosperity of the 
road is dependent simply on the general prosperity of its ter- 
ritory, and not upon any single industry. It is evident, however, 
that its territory is distinctly a farming section, and that the 
earnings of the road are, at bottom, dependent upon the yield 
of the fields. 

Passenger earnings represented 20% of the gross earnings of 
the company in 1906. 

Stability of Earnings. 

The mileage operated has not increased in ten years as 
rapidly as might have been expected, but a very considerable in- 
crease will take place in case the Pacific extension is carried out. 

The gross earnings per mile have risen from $5,281 in 
1895-6, to $7,961 in 1905-6, an increase of very closely 50%. This 
increase has been very steady, showing practically no setbacks, 
but it was especially large in the year of 1906. The full table 
follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1. 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


6,188 
6,191 
6,191 
6,191 
6,347 
6,512 
6,605 
6,647 
6,829 
6,908 
6,961 


$32,681,829 
30,486,768 
34,189,664 
38,310,632 
41,884,692 
42,369,013 
45,613,125 
47,662,738 
48,330,335 
49,884,114 
55,423,052 


$5,281 

i 4,923 

L5,522 

| 6,187 

| 6,851 

6,506 

6,906 

7,171 

7,077 

7,221 

7,961 



The steady increase in the earnings has been accomplished 
in the face of a steady reduction in the average rate per ton mile 
received from freight, the average of the road being: 

1877 2.08 cents. 

1887 1.09 

1897 1.00 

1906 86 



218 



CHICAGO, MILWAUKEE & ST. PAUL 
Maintenance. 



The maintenance charges for the St. Paul, compared with 
eastern roads look small. They average only a little over $900 
for way, and a little over $600 for the equipment. They are con- 
siderably smaller, for example, than the Chicago and North West- 
ern, where the average for way is $991 and for equipment $858. 
The items for six years are as follows : 





Traffic Density 


Maintenance per Mile 


Total 


Year 


Way 


Equipment 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


558,965 
604,095 
605,048 
576,717 
590,824 
670,373 

601,003 


[$999 

1,092 

1,105 

750 

773 

857 

$929 


$464 
509 
585 
681 
750 
804 

$632 


$1,463 
1,601 
1,690 
1,431 
1,523 
1,661 


Average 


$1,561 






Traffic Density 


Maintenanc 


e per Mile 


Total 




Way 


Equipment 


C. & N. W... 
C, B. & Q... 
Rock Island . . 


640,983 
580,024 
462,106 


$ 991 
1,104 
1,022 


$ 858 

1,032 

759 


$1,849 
2,136 
1,787 



On a traffic density of 600,000 ton-miles per mile of road 
operated, a total maintenance of from $1,500 to $1,600 per mile 
does not seem very liberal. Had the figure been equal to that of 
the North Western for 1906, this would have added $500 per mile 
to the St. Paul's maintenance charges for that year, which on a 
total of nearly 7,000 miles would have entailed an additional 
expenditure of $3,500,000. It is evident that on such a scale of 
expenditure, the surplus shown would have been much smaller 
than it was. 

In the report for 1906, the average of cost for repairs was 
stated at $1,438 per locomotive; $667 per passenger car; and $46 
for freight cars. 

Merely as an instance of the wear and tear losses to which a 
large railway is subjected, the company's report for 1906 states 
that during the year, 444 cars belonging to the company were 
destroyed by wreck or fire on its own and other roads, and that 
3,662 old freight cars unfit for economical service, and 30 small 



CHICAGO, MILWAUKEE & ST. PAUL 219 

locomotives were dropped from the inventory of equipment. In 
addition to this, the inventory at the close of 1905 showed a short- 
age of 384 cars and a sum sufficient to replace them was charged 
to operating expenses. At the close of 1906 there was a shortage 
of 246 cars, and one locomotive. 

Improvements. 

The maintenance charges of the St. Paul have been consider- 
ably below those of the North Western; likewise the sums set 
aside from surplus earnings have been considerably less, the 
items for improvements for seven years being as follows : 

Renewal and Addition to 

Year. Improvement Fund. Property. 

1899-0 $3,025,305 

1900-1 2,296,256 

1901-2 2,245,000 

1902-3 1,105,000 

1903-4 $707,575 

1904-5 619,960 

1905-6 1,511,758 712,331 

Total $12,223,185 

This sum compares with $33,002,000 set aside by the North 
Western within the same period. 

In addition to the above sums the report for 1906 shows a net 
of $2,540,466 set aside for the replacement of freight cars, drop- 
ped from the inventory. This amount would bring the total set 
aside from the surplus earnings for the year up to $4,765,000, 
and this sum added to the charges for regular maintenance, would 
bring the total maintenance up to $15,283,000, or $2,195 per mile, 
that is to say it would increase the nominal sum devoted to mainte- 
nance by 50%. 

Surplus Earnings. 

The surplus earnings shown below are the total sums avail- 
able for dividends and improvements after payment of Fixed 
Charges, and before the sums set aside as in the table above, have 
been deducted. 

For example, from the nominal surplus shown for 1906, the 
amount of $4,765,000 should be deducted to show the net surplus 
available for dividends. This would reduce the percentage shown 



220 



CHICAGO, MILWAUKEE & ST. PAUL 



as earned on common by one-third. The table for a series of 
years follows : 



Year 


Surplus 


Dividends 
Paid on 
Preferred 


Per cent. 

Earned on 

Common 


Dividends 

Paid on 

Common 


Average 
Price 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


$10,476,414 
12,115,458 
11,578,260 
11,425,976 

12,478,788 
14,905,318 


7 
7 
7 
7 
7 
7 


13.1 
15.2 
14.2 
13.8 
15.5 
19.7 


6 

7 
7 
7 
7 
7 


139 
165 
175 
152 
151 
191 



The column of "Per cent, earned on Common," does not repre- 
sent the amount actually available for dividends on the common 
stock, since after 7°/o has been paid on both the common and 
preferred, the two issues share alike. So for example, after seven 
per cent, was paid on both stocks the balance of surplus would 
have been equivalent, for 1906, to very nearly 7% more, on both 
the common and preferred (6.9), but if from this balance of sur- 
plus, were deducted $4,765,000 devoted to improvements, the re- 
mainder would be equal to only about 2^2% on the two classes 
of stock. 

Presuming that these appropriations would not have been 
made if they had not been needed, this latter figure is of interest 
as indicating the margin nominally available for an increase of 
dividends on either class of stock. 

Dividend Record. 

As a dividend earner, the St. Paul has a record surpassed by 
no western railway. With the single exception of the year of 
1875, for 35 years the dividend has been paid upon the preferred 
stock continuously, though in the early days, in one or two years, 
these dividends were paid in bonds. 

There is a provision as to the preferred stock that its divi- 
dends are cumulative to the extent that they are earned, and not 
otherwise. This accounts for the peculiarities of some of the 
earlier dividend payments. 

The road suffered in the years from 1889 to 1891, and in these 
three years, the dividend on the common was suspended. Since 
1892 a dividend has been paid continuously. The full record 
is as follows : 



CHICAGO, MILWAUKEE & ST. PAUL 



221 



Years 



1870 . . 

1871 . . 
1872-3. 

1874 . . 

1875 . . 

1876 . . 

1877 . . 
1878... 
1879... 
1880-4. 
1885.. . 
1886-7. 
1888.. . 
1889.. . 
1890-1. 
1892.. . 
1893-4. 
1895.. . 
1896.. . 
1897-00 
1901.. . 
1902-6. 



Preferred 








Common 


7 %cash and 


3% 


scrip 


3% 


cash and 7% scrip 


7 % " 








7% " 


7 % " 










7 % bonds 










3£% cash and 


14% 


bonds 






3*% " 










10i% " 










7% cash 






2*% 


cash 


7% " 






7% 


<< 


7% " 






4% 


(< 


7% " 






5% 


<< 


6% " 






24% 


< < 


7% " 










7% " 










7% " 






2% 




« 


7% " 






4% 




« 


7% " 






2% 




< 


7% " 






4% 




« 


7% " 






5% 




i 


7% " 






6% 




< 


7% " 






7% 




« 



The Balance Sheet. 

The balance sheet at the end of June, 1906, showed that the 
company was quite decidedly in need of working capital. The 
current assets amounted to $9,566,797; the current liabilities to 
$16,440,706. 

This left an adverse balance of $6,873,989. Of the current 
liabilities, however, $2,719,962 was interest accrued and not yet 
payable. The chief item was bills payable, $6,850,000. 

The item of cash showed $5,276,888. The company's need 
of cash capital was later supplied by the sale of stock, as noted 
above. 

The credit to profit and loss, itemized as Income Account 
in the report, was $33,789,997. 

The St. Paul Extension. 

The most important event in the history of the St. Paul for 
many years was the determination of its directors to extend the line 
to the Pacific coast. The route chosen is to the outside view 
quite inexplicable. Between the Union Pacific and the Northern 
Pacific lines there is a wide belt of territory, from two to three 
hundred miles broad, which is crossed by no east or west road, 
unless the diagonal path of the Oregon Shortline be considered. 



222 CHICAGO, MILWAUKEE & ST. PAUL 

A road pursuing something of a middle course through this belt 
would tap a country rich in coal, oil and minerals, and have a wide 
field to itself. Instead of building through this belt, the St. Paul 
is extending westward from its most northerly western terminal, 
at Evarts on the Missouri river. It strikes directly for the Yel- 
lowstone River, near Miles City, and from this point to the coast 
to all intents it doubles the route of the Northern Pacific, cross- 
ing and recrossing the tracks of that road, the two lines rarely 
lying more than 40 or 50 miles apart and for long stretches side 
by side. 

The St. Paul's extension will be an expensive piece of road 
to build; its cost is estimated by the St. Paul officials as some- 
thing like $50,000 per mile and it seems likely to be more, rather 
than less than this. It is being built at a time when labor and 
material are at the highest point in 15 years, its line will be 
slightly longer than the Great Northern route from Chicago to 
the Pacific and longer, too, than the Northern Pacific's route, 
when the Helena cut-off is completed; it will cross four mountain 
ranges as against two for the Great Northern, and two for the 
Northern Pacific when a cut out on that road in the Rockies is 
completed. 

In brief, neither as to grades, length of line nor cost does it 
present any advantages over its rivals ; rather the reverse. When 
the Great Northern's water grade line from Spokane to Portland 
is built, that road will be able to carry freight at a lower rate than 
any other transcontinental line, this construction being a part of 
the scheme outlined in President Hill's boast that before the 
Panama Canal is completed, he would have a line from the Great 
Lakes to the Pacific able to carry freight at such rates that lily 
pads would be growing in the canal. This is the sort of compe- 
tition that the St. Paul extension must meet and which to the 
outside view, it will be in no position to meet. 

It is true that the St. Paul's capitalization is very low; and 
even with the addition of 1,500 miles of road costing $50,000, or 
$60,000 per mile, it will be relatively low. It will be lower than 
the Union Pacific or the Northern Pacific, but on the other hand, 
it will be met by the almost equally low capitalization of the Great 
Northern, with apparently higher haulage costs. It is true that 
the earnings of the Great Northern and of the Northern Pacific 
have been enormous. Likewise that there is an immense and 
growing business from the Puget Sound ports, eastward. But 



CHICAGO, MILWAUKEE & ST. PAUL 223 

the Northern Pacific, and especially the Great Northern have 
been for a number of years endeavoring to put themselves in the 
best possible shape to take care of this business, and the Union 
Pacific is now entering the same field and will soon be ready, 
bidding for its share of this traffic. It is equally true that the 
same interests which now control the St. Paul practically domi- 
nate the copper industry which enters in Montana and that a 
large and growing traffic can probably be turned to the St. Paul 
when it reaches these fields. 

But with all these considerations, when the new route of the 
St. Paul is followed upon the map it bears resemblance to noth- 
ing so much as the West Shore-Nickel Plate paralleling of the 
Vanderbilt lines from New York to Chicago in the eighties. It 
is well known that the controlling interests of the St. Paul are 
now closely associated with the controlling interests of the Union 
Pacific, and the latter are engaged in lively rivalry with the Hill 
lines. It is impossible to suppose that so shrewd and conserva- 
tive a management as that of the St. Paul should have entered 
upon this enterprise without being fully convinced of its sound- 
ness, and yet to the outside view it bears much more the appear- 
ance of a weapon or a club than a business enterprise standing 
on its own feet. 

It would be absurd, however, to suppose that this extension 
could seriously cripple so rich and prosperous a road as the St. 
Paul. The new line is being built by stock issues rather than by 
bonds and undoubtedly a large traffic can be turned through it 
which would be impossible if it were an independent line. The 
percentage of net income consumed by fixed charges on the St. 
Paul is exceptionally low, so that even if the extension were to 
justify the most pessimistic criticisms it would still in no wise 
affect the value of the funded securities. 

Investment Value. 

But undoubtedly the St. Paul's extension has a very mate- 
rial bearing upon the future of the stock values of the road and 
should the work of construction be pressed, the new stock issues 
required for this work will weigh rather heavily on the market 
price. Probably there are many who would be in no wise sur- 
prised if the extension were to stop in Montana and not be car- 
ried forward for at least some years to come. 



224 CHICAGO, MILWAUKEE & ST. PAUL 

Meanwhile the significant fact which the investor in St. Paul 
must consider is that the capital stock in a single year has been 
increased from 107 to about 230 million dollars; that is, it has 
been more than doubled. As already noted, in the issuance of 
this stock, rights have accrued to the shareholders amounting to 
from $45 to $50 per share, and in considering the value of St. 
Paul, common and preferred, this amount is more or less to be 
added to the market price. 

Following this heavy issue of new stock, in the general reces- 
sion of prices in the spring of 1907, St. Paul preferred sold down 
to $145 per share and the common to $122 per share. This was 
equivalent, rights included, to about $190 and $167 on these 
stocks, which compares with a quotation of $160 per share for 
the preferred and $147 for the common in the very moderate 
slump in the spring of 1906. It is evident that on a prolonged 
recession of prices these stocks might sell very much lower. At 
the low level of 1903-4, the preferred sold down to $168 and the 
common to $133. But how heavily the new issues will weight 
the stock would be only the merest guess. Obviously the pivotal 
question is as to whether, if the St. Paul goes on with this new 
work of construction, it Can continue comfortably paying its 7% 
dividends. 

It has already been pointed out that even in the prosperous 
year of 1906, if St. Paul maintenance had been up to the level of 
the North Western, to say nothing of the Burlington, the margin 
remaining over after the payment of the 7% dividends was not 
large. In the new issue of stock, the amount of preferred was 
rather heavier than that of the common, $66,000,000 of preferred 
against $57,000,000 of common. But it is not at all likely that 
even a very serious business depression would impair the secur- 
ity of the dividend on the preferred. This stock has now received 
its 7% dividends continuously for eighteen years. With the pros- 
pect of an increase in the dividend rate and further "rights" cut 
out, this stock would tend to sell more to the level of a solid 7% 
security; that is, at an average around $150 to $170 per share. 

St. Paul common, is a much more speculative commodity. 
As one of the old "market leaders" it has tended to fluctuate 
rather violently. It is what is known as a "volatile" stock. Obvi- 
ously after the heavy issues of 1906, with the consequent cash 
dividends equivalent to about $50 per share, the stock would 
tend to sell at considerably lower levels than for several years 



CHICAGO, MILWAUKEE & ST. PAUL 225 

previous; that is, if there were no other considerations. There is 
such a consideration, however, and this is that the St. Paul is a 
very valuable property, alike in itself and from a strategic point 
of view. At least before the new issues, control of St. Paul would 
readily have sold at very considerably above $200 per share. It 
is not in the least likely that the present interests in control would 
ever allow this valuable asset to be slipped from under them, 
and that is why the floating supply of St. Paul, so long as the 
present rivalry between the Hill interests and the Union Pacific 
interests continues, is likely to be relatively small. This means 
that it would hardly go to as low a level as it otherwise might, 
even in a general slump, and that on the other hand, being so easily 
subject to manipulation, it is likely to show much higher prices 
than its intrinsic value would justify. 

There seems no reason why St. Paul on a 7% basis should 
sell at a higher figure than, let us say, Pennsylvania, and if Penn- 
sylvania, on 1906-7 levels could sell below 120, St. Paul common 
might readily do the same. Purchased and laid away at such 
figures as this it might, under the conditions outlined, readily 
show a large profit to its holder, always provided that its earn- 
ings continue to justify the payment of its present dividend. 



15 



CHICAGO, ST. PAUL, MINNEAPOLIS AND 
OMAHA RAILWAY. 

The "Omaha," as it is familiarly known, is in reality simply 
a part of the Chicago and North Western system, and since 1883 
has been practically operated as a part of the larger road. It, 
however, reports separately. 

The road was formed through the consolidation in 1880, of 
the Chicago, St. Paul and Minneapolis, the St. Paul and Sioux 
City, and the North Wisconsin railroads. It operates 1,693 miles 
of road, running in a southwesterly direction from Ashland and 
Duluth on Lake Superior through St. Paul and Minneapolis, to 
Sioux City and into Nebraska. 

Of its $29,818,864 of capital stock, $14,700,000 is owned by 
the Chicago and North Western. This is almost an even half, and 
with a few shares owned by the directors, makes up a controlling 
interest. 

Nine of its thirteen directors come from the North Western 
board. The other four include Eugene E. Osborn, vice-presi- 
dent and general secretary, New York, Thomas Wilson, general 
counsel, St. Paul ; John M. Whitman, Chicago ; and John A. 
Humbird, St. Paul. 

The executive committee is made up entirely in the Vander- 
bilt interest, four of its seven members being Vanderbilt directors, 
and likewise belonging to the New York Central and Lake 
Shore boards. 

In 1905, the Omaha reported 1,045 stockholders. 

Capitalization. 

The capital account of the road on June 30, 1906, stood 
as follows : 

Common stock outstanding $18,558,953 

Preferred stock outstanding 11,259,911 

Total stock $29,818,864 

(226) 



CHICAGO, ST. PAUL, MINNEAPOLIS & OMAHA 227 
Bonded Debt (net) $27,096,800 

Nominal capital $56,915,664 

Rentals cap. at 4% 3,087,500 

Approximate gross capitalization $60,003,164 

Securities held 362,752 

Approx. net capitalization $59,640,412 

Approx. net capital, per mile $35,227 

Average miles operated 1,693 

Net earnings on net capitalization . . , 8.8% 

Stock on net capitalization 50% 

Fixed Charges on Total Net Income . . 42% 

Factor of Safety 58% 

The capitalization per mile of road is slightly higher than 
that of the North Western, and the net earnings show a slightly 
lower percentage of the estimated net capitalization, the 8.8% 
on the Omaha comparing with 10.5% on the North Western, and 
with 9.7% on the St. Paul. 

The Fixed Charges consume only 42% of the total net in- 
come, leaving a wide margin of safety for the securities of the 
road. 

The amount of preferred stock is not large, so that the 
margin of safety on the dividends on this stock is also ample. 

The company holds in its treasury $2,844,000 of common 
stock, $1,386,000 of preferred, and $805,000 of its own bonds. 
These have not been included in the estimate of capitalization. 
Likewise the treasury holds $50,000 of Sault Ste. Marie and 
Southwestern first mortgage bonds, and $1,500,000 of Superior 
Short Line Railway bonds. 

As these are carried as liabilities in the balance sheet, they 
have likewise not been included in the securities held or deducted 
from the estimated capitalization. 

The balance of the company's holdings are very small and 
represent no equities worth mentioning. 

Since the control of the road was obtained by the North 
Western in 1882, its capitalization has remained practically stati- 
onary, and in fifteen years the funded debt has slightly increased. 



228 CHICAGO, ST. PAUL, MINNEAPOLIS & OMAHA 

Stability of Earnings. 

In the six years from 1900, the gross earnings increased 25%, 
and the earnings per mile about 15%, as the following table 
indicates : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1900 

1901 

1902 

1903 

1904-5 

1905-6 


1,544 
1,574 
1,605 
1,660 
1,683 
1,693 


$10,342,900 
11,196,404 
11,907,525 
12,055,271 
11,926,000 
12,943,750 


$6,698 
7,113 
7,240 
7,261 
7,087 
7,645 



Maintenance. 

The traffic density of the road is considerably under that 
of the North Western, but its average for maintenance of way 
has been higher than that of the larger road. The average 
expenditure for equipment has been somewhat lower than the 
North Western's, but the total for maintenance per mile has been 
larger. The items follow: 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900 

1901 

1902 

1903 

1904-5 

1905-6 


489,466 
522,963 
529,374 
538,628 
520,031 
517,077 

519,589 


$1,228 

1,269 

1,207 

1,010 

821 

959 


$592 
680 
657 
691 
685 
714 


$1,820 
1,949 
1,864 
1,701 
1,506 
1,673 


Average 


$1,083 


$669 


$1,752 



Mileage extra track, 42. 

Improvements. 

In addition to the regular appropriations for maintenance, 
the road has followed the usual Vanderbilt custom of setting 
aside funds from the surplus earnings for improvements. These, 
in the last seven years, have averaged slightly above $500,000 
per year. In 1906 the sum set aside was $600,000 as against 
$400,000 in 1905. 



CHICAGO, ST. PAUL, MINNEAPOLIS & OMAHA 229 



Surplus. 

As part of a prosperous system, the road has been able to 
show fairly liberal maintenance charges, and still have a com- 
fortable surplus for the payment of its dividends. The following 
shows the annual surplus before the improvement fund has been 
charged off. 



Year 


Surplus 


Dividends 

Paid on 

Preferred 


Per Cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Average 
Price 


1901 

1902 

1903 

1904-5* 

1905-6 


$2,729,252 
2,918,336 
2,751,726 
2,641,130 
3,018,140 


7 
7 
7 
7 

7 


10.5 
11.5 
10.6 
10 


5 
6 
6 

7 

7 


mi 
136 
155 J 
139 i 
147 
188 JH 



*Fiscal year charged. 

Dividend Record. 

The dividend record is as follows : 

Year. Preferred. 



Common. 



1881-4 . 
1885... 
1886-8 . 
1889... 
1890-1 . 
1892... 
1893-6. 
1897-8 . 
1899... 
1900-1 . 
1902-4 . 
1905-6 . 



7 

6 
3 
4 

6y 2 

7 
7 
7 
7 
7 



2 

5 
6 
7 



The Balance Sheet. 

At the close of the fiscal year of 1906, the balance sheet 
showed : 

Current assets $2,270,405 

Current liabilities 3,022,215 



Leaving an adverse balance of $751,810 



To this should be added $897,819 balance of improvement funds 
which was not apparently represented in the quick assets. The 
same is true of trie $3,034,489 to credit of Profit and Loss, and 
the Land Income Account. The road was therefore in need of 
working capital. 



230 CHICAGO, ST. PAUL, MINNEAPOLIS & OMAHA 

Investment Value. 

The preferred stock has a prior right to dividends up to 7%, 
but the common cannot receive more than is paid on the pre- 
ferred ; in other words, above 7% the two stocks share alike. 

The 7% on the preferred, after having been paid in the 
prosperous years of the early eighties, was cut down until, in 
1893-6, it disappeared entirely. It was resumed in 1897 and since 
paid continuously ; that is to say, for eight years. There seems 
to be every prospect for its continuance indefinitely. The amount 
of the preferred is small, and the amount earned on the common 
over the preferred dividends for five or six years has averaged 
above 10%. This has left a very ample margin for the pre- 
ferred, and it may therefore be regarded as one of the solidest 
7% stocks on the market. Prospects disregarded, with money 
at 4%, it is entitled to sell at around $175 per share. As a 
matter of fact it has sold considerably above this, rising to $230 
per share in the year 1905. It is fairly clear that this high price 
was based upon prospects for an increased dividend. It is 
equally clear from the returns, that no such increase was immedi- 
ately in view. Even in the exceptionally prosperous year of 1906, 
the net surplus, after charging off the improvement fund, and 
dividends, amounted to only $331,000, which was equivalent to 
only a little over one per cent, on the total stock outstanding. 
With a road whose balance sheet shows it to be in need of cash 
working capital, it is hardly likely that every copper of the 
surplus would be paid out. 

The maintenance charges of the Omaha are fairly heavy, 
compared with other western roads, and possibly conceal some 
earnings. On the other hand the Vanderbilt policy is distinctly 
not in the direction of high dividends but rather towards heavy 
improvements. The surplus shown in five or six years has 
varied very little, making it evident that the maintenance charges 
have been adjusted to earnings. 

Unless this policy should be radically changed it is probable 
that the dividend on the preferred will remain as in the ten years 
from 1897. 

This is likewise true of the dividend on the common. It 
was only begun in 1897, and 7% has been paid only from 
1905. The common shares equally with the preferred, and in 



CHICAGO, ST. PAUL, MINNEAPOLIS & OMAHA 231 

order that it should have an additional one per cent., this would 
have to be paid on the entire amount of stock outstanding. 

On the other hand the road is prosperous, the maintenance 
charges are ample, and the surplus shown easily provides for 
the 7% dividend on the common, with something left over. The 
common may therefore be regarded as a fairly solid 7% stock, 
with excellent prospects should prosperity continue. On this 
basis it would probably be regarded by investors as an attractive 
purchase at from $140 to $160 per share. Since it was put on 
a 7% basis, it has sold as high as $225, in January, 1905. It 
sold down to $120 per share in the general decline of 1907. 



THE CINCINNATI, HAMILTON AND DAYTON 

RAILWAY. 

The Cincinnati, Hamilton & Dayton in 1904-5 was the central 
company in the big merger of that road, the Pere Marquette 
and the Chicago, Cincinnati & St. Louis, which was to form 
the Great Central system. Within a little more than a year from 
the date of the combination, it passed into the hands of a 
receiver and the system was dismembered. 

The Cincinnati, Hamilton & Dayton operates a main line 
from Cincinnati to Toledo with branches to Ironton on the 
Ohio River and westward through Indianapolis to Springfield, 
111. In 1906 it operated an average of 1,038 miles. 

The present company represents the consolidation in 1895 of 
the old Railroad company * with the Cincinnati, Dayton & Ironton 
and the Cincinnati, Dayton & Chicago. The Indiana, Decatur & 
Western was afterwards acquired. It leases the Dayton & Michi- 
gan. The road was chartered in 1846 and the main line opened 
in 1851. It has had a checkered career and illustrates the principle 
of heredity in railroad management which has frequently been 
dwelt upon in these pages. 

In 1882 President Jewett and his associates of the Erie Rail- 
road acquired control, through a guarantee of dividends on the t 
stock which they were afterwards unable to fulfill. In 1887 the 
road fell into the hands of the notorious "Napoleon" Ives, who, 
after running the printing press overtime for the issue of new 
stock, came to a spectacular smash in August of that year. It 
was probably one of the few times in the history of the Stock 
Exchange that a disaster was greeted with cheers. 

In 1904 a new element came into control, with ambitious 
designs. Apparently for the purpose of reducing the amount of 
capital required to control the road, $6,925,500 of the 5% pre- 
ferred and all of the $1,074,500 of the 4% preferred was bought 
in by the company at the rate of $110 for the first and $100 for 
the second. Gold notes to the amount of $15,000,000 were issued ; 

(232) 



CINCINNATI, HAMILTON & DAYTON 233 

and in the same year $12,834,450 par value of the $16,000,000 
outstanding common stock of the Pere Marquette and $1,487,800 
of the outstanding $12,000,000 of preferred of the same road was 
purchased. 

For the common stock $125 per share was paid, the pur- 
chase apparently being made principally on a report dated May 
16, 1904, presented to the directors by Jabez T. Odell, Vice- 
President of the Pittsburg, Bessemer & Lake Erie. In that year 
4% had been paid on the Pere Marquette preferred and 1% on 
the common. Reference to the analysis of the Pere Marquette 
will reveal that in order to pay these dividends, maintenance 
charges and operating expenses generally had been cut down to 
a minimum, and that had these charges been up to the standard 
of other roads in the same section, practically no surplus would 
have been shown. In proof of this it is sufficient to note that in 
the year following the purchase — that is, in 1905 — under the 
management of so capable a railroad official as Russell Harding, 
on an increase of a million and a quarter of dollars in gross 
earnings, net earnings showed a decrease of nearly one million 
dollars. It does not appear that the combination of the two roads 
was of any advantage to either, for the gross earnings of the Cin- 
cinnati, Hamilton & Dayton for 1905, following the purchase, 
showed a decrease rather than a gain, and the Pere Marquette 
increase was slight. In other words, the Cincinnati, Hamilton & 
Dayton paid $125 per share for $12,000,000 and over of common 
stock, on which nothing was legitimately being earned and from 
which no other advantages apparently were derived. 

On January 12th of 1905, the lease of the Pere Marquette 
for 999 years was formally ratified, the C. H. & D. guaranteeing 
4% on the preferred stock of the Pere Marquette and five per 
cent, on the common. 

For the fiscal year of 1905 the C. H. & D. showed a deficit 
and on December 4th a receiver was appointed. The board of 
directors which performed this brilliant feat of railway finance 
was, as given in the report of 1905, published later by the receiver, 
as follows : Eugene Zimmerman of Cincinnati, president ; Rus- 
sell Harding, vice-president; Joseph B. Foraker, United States 
Senator from Ohio; James N. Wallace of the Central Trust Co., 
New York ; Frederick L. Eldredge, Arthur Turnbull, Alfred Skitt, 
Richard N. Young, all of New York; Thomas H. Tracy, and 
James J. Robison of Toledo; Win, L. Dechant of Middletown, 



234 CINCINNATI, HAMILTON & DAYTON 

Ohio ; and Charles A. Otis, Cleveland. The executive committee 
consisted of 

Eugene Zimmerman James N. Wallace 

Thomas H. Tracy Arthur Turnbull 

In September, 1905, through J. P. Morgan & Co., the Erie 
Railroad arranged to acquire control by purchase of about $5,000,- 
000 of stock, "but the obligations of the Cincinnati, Hamilton & 
Dayton under lease and under other contracts being found un- 
duly heavy, Mr. Morgan in November, 1905, relieved the Erie of 
its purchase." The price which the Erie Railroad was to pay 
for the stock of this road, which for the fiscal year 1905 closing 
June 30th, had shown a deficit, and which one month after it 
had been returned to the Morgan interests was placed in the 
hands of a receiver, was one hundred and sixty dollars per share. 

In an action brought by Homer Lee against Henry F. Shoe- 
maker, Chairman of the Board of Directors of the Cincinnati, 
Hamilton & Dayton, Eugene Zimmerman of Cincinnati, and H. 
B. Hollins & Co., of New York, $2,000,000 was claimed as due 
on the profits of the merger of the Pere Marquette and the C. H. 
& D. The complaint asserted that Lee and Wm. J. Hiland were 
instrumental in adjusting the deal by which the merger was put 
through and that the profits amounted to $20,000,000, of which 
it was agreed they should receive 10%. This suit was discon- 
tinued under a stipulation signed by all the parties under action 
before being brought to trial. 

In 1906 the lease of the Pere Marguette was set aside and 
the two roads again operated separately. 

The directorate as given in the report of 1906 was composed 
of George W. Perkins, of J. P. Morgan & Co., Chairman of the 
Board; F. D. Underwood, president of the Erie, president; 
Samuel Spencer, Henry F. Shoemaker, Charles Steele, George F. 
Baker, George W. Young, Norman B. Ream, all of New York; 
R. R. Rhodes, J. H. Clarke, C. A. Otis, Jr., of Cleveland ; W. L. 
Dechant of Middletown, Ohio ; and N. Monsarratt of Columbus, 
Ohio. 

In 1905 the road reported 1,558 shareholders. 

Capitalization. 

Practically all of the preferred stock was bought in under 
the arrangement noted above, at $110 and $100 per share and on 
June 30th, 1906, the Central Trust Co., of New York had on 



CINCINNATI, HAMILTON & DAYTON 235 

deposit for the purchase of this stock $8,645,026. In the following 
table this latter amount has been included under the item of 
securities held, and deducted from the gross capitalization shown. 

Common stock $8,000,000 

Preferred stock 8,000,000 

Total stock $16,000,000 

Funded debt (net, including Leased & 

Auxiliary Co.'s) 47,944,000 

Leased Lines Guar. Stock 3,713,200 

Equip. Obligations (Inc. leased lines) . . 2,784,000 

Receiver's Certificates 511,830 

Total Capital $70,953,030 

Securities held $29,814,266 

Approx. net capital $41,138,784 

Approx. net capital per mile $39,627 

Average miles operated 1,038 

Net earnings on net capital 4.8% 

Stock on net capital 36% 

Fixed Charges on Total net Income 147% 

Factor of Safety 

In the item of securities held given above is included $16,- 
570,273 book value of a liability interest in the stocks owned by 
the Michigan Security Company. This apparently includes the 
$12,000,000 par value Pere Marquette common stock purchased 
at $125 per share. Inasmuch as the Pere Marquette in 1906 
earned a deficit and the $16,000,000 of outstanding common stock 
comes behind $12,000,000 of preferred stock, it is evident that 
this stock, figured at the price which the common stock of bank- 
rupt roads is usually worth, from $10 to $20 per share, — 
represented a corresponding loss to the shareholders of the 
Cincinnati, Hamilton & Dayton. The entire Other Income of 
the C. H. & D. for 1906 was only $120,735. 

The actual net capital of the company was therefore some 
$10,000,000 or $12,000,000, or more than 25% higher than as 
indicated by the table above, and the approximate net capitali- 
zation was actually above $50,000 per mile. As the larger part 



236 



CINCINNATI, HAMILTON & DAYTON 



of this was in bonds, etc., this on a road earning $8,000 per mile, 
was a heavy load. Even under the very remarkable manage- 
ment displayed by Receiver Judson Harmon, in the prosperous 
year of 1906, net earnings really amounted to less than 4% on 
the estimated net capital. 

The deficit shown for the year was $1,147,630, equal to 
nearly one and a half times the Total Net Income. 

Character and Stability of Traffic. 

Passenger traffic contributed in 1906 about 22% of the gross 
earnings. Of the freight tonnage 44% was products of mines, 
12% lumber, etc., 15% farm products, 14% manufactures. 

The mileage and earnings of the road over a period of 
vears have shown as follows: 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896-7 


652 


$4,627,352 


$7,101 


1897-8 


652 


4,908,563 


7,533 


1898-9 


652 


5,241,503 


8,044 


1899-0 


652 


5,735,531 


8,802 


1900-1 


652 


5,837,916 


8,953 


1901-2 


652 


6,352,164 


9,741 


1902-3 


1,015 


7,997,223 


7,878 


1903-4 


1,015 


8,104,831 


7,985 


1904-5 


1,032 


8,008,917 


7,760 


1905-6 


1,038 


8,398,417 


8,090 



In the receiver's report for 1906 attention is drawn to the 
fact that the statement of earnings for 1906 "included actual 
earnings only, while the statement for 1905 included items which 
were not earnings. For instance, in June, 1905, $106,086 of 
overcharges paid in 1905, on business done before July 1st, 1904, 
was credited to freight earnings for that month, and charged 
directly to profit and loss." This was under the Zimmerman 
administration. 

It will be seen that although the gross earnings have in- 
creased considerably, this was due to additional mileage and 
the mileage earnings have shown considerable decline from 1902, 
when they reached nearly $10,000 per mile. 

Maintenance. 
From 1900 the charges to maintenance have been as follows : 



CINCINNATI, HAMILTON & DAYTON 



237 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


954,371 
1,041,538 
813,376 
776,448 
816,070 
905,209 

917,835 


$870 

876 
773 
767 
876 
1,101 

$877 


$941 
1,081 
911 
1,063 
1,165 
1,353 

$919 


$1,811 
1,957 
1,684 
1,830 
2,041 
2,454 


Average 


$1,796 


Wabash 

Tol. & 0. C 
Lake E. & W. . . 


910,426 

880,032 

1,423,424 

592,307 


$1,184 

1,332 

1,225 

999 


$1,693 

1,370 

1,471 

733 


$2,877 
2,702 
2,696 
1,732 



The C. H. & D. is a normal or typical railroad, similar to 
others in its vicinity and it might readily be supposed, therefore, 
that its average maintenance charges would be about the same 
as its competitors. Reference to the above table shows, how- 
ever, that the Vandalia and the Wabash, with approximately 
the same traffic density, spent in the six years under view an 
average of about $1,000 per mile more. The Lake Erie & 
Western, with about two-thirds the traffic density spent as much 
as the C. H. & D. There was nothing in the superior physical 
condition of the road to make it possible to operate the C. H. 
& D. on such a standard of maintenance and had its standard 
been up to the level of other roads in the same section, the added 
charges would have wiped out the larger part of the nominal 
surplus shown from 1891 to 1905. 

Surplus Earnings. 

As it was, the nominal surplus shown was as follows : 

1900-1 $756,363 

1901-2 947,264 

1902-3 1,161,151 

1903-4 793,530 

1904-5 *241,224 

1905-6 *1, 147,630 

*Deficit. 

It will be seen that in 1905, under the Zimmerman adminis- 
tration, the company showed a deficit of $241,224. Only $192,921 



238 CINCINNATI, HAMILTON & DAYTON 

of this was due to increase in rentals paid under the lease of 
the Pere Marquette. It was on the showing made during this 
year that it was proposed in the September following to sell 
five millions of this common stock to the Erie Railroad at $160 
per share. 

Condition. 

Receiver Judson Harmon took charge of the property on 
Dec. 4th, 1905, and the report for 1906 included seven months 
of operation under his receivership. Gross earnings for the 
year showed an increase of $389,500. This was in the face of 
a decline in the average rate per ton mile of from .80c. to .74c. 
Owing to the increase in operating expenses, net earnings were 
slightly less than in 1905. This was wholly due to an increase 
in maintenance charges which were about $550,000 more in 1906 
than in 1905. 

In the face of an increase of nearly 100,000,000 ton miles 
of revenue freight carried, and the generally higher cost of 
materials and labor, the cost of conducting transportation de- 
clined slightly; in other words, while this item was 61 °/o of 
the operating expenses in 1905, it was 56.7% in 1906. 

There was an apparent increase of $176,133 in taxes, but 
the report states that "this was chiefly due to the charging of 
an omitted half year's taxes to bring the accruals to June 30th, 
1906." In other words, this item might legitimately be deducted 
from the deficit shown in 1906 and added to that shown in 1905. 

The report states that the greater part of the increase of 
$812,143 in interest charges was caused by the addition of $490,- 
000 interest on the $15,000,000 of collateral trust notes issued in 
part to acquire in the company's 4% preferred stock at $110 per 
share and to secure control of the Pere Marquette, and $312,000 
interest on the 4% refunding mortgage of July 1st, 1904. 

The report of the receiver in 1906 states what the report of 
1905, made up by the company, did not state: that on the 
$8,250,000 of refunding mortgage bonds which were issued and 
drew interest from July 1st, 1904, only four months' interest 
was charged to income account, "the remainder being charged 
to Capital Account." 

The report further states that the interest on the $15,000,000 
collateral trust notes was charged for the full year, although 
no payments have been made thereon since September, 1905. 



CINCINNATI, HAMILTON & DAYTON 239 

From December 4th, 1905, to the close of the fiscal year, 
receiver's certificates to the amount of $511,830 were issued. 

In further evidence of the able and energetic management of 
the road under the receivership, it may be noted that the number 
of revenue freight tons per train mile rose from 301 tons to 371 
tons, and that the average earnings per freight train mile rose 
from $2.04 to $2.30 in the face of the decline noted above of 
the average freight rate from .80c. to .74c. 



CINCINNATI, NEW ORLEANS AND TEXAS 
PACIFIC RAILWAY. 

(Lessee of the Cincinnati Southern Ry.) 

The Cincinnati, New Orleans & Texas Pacific comprises part 
of what is known as the Queen & Crescent route, which operates 
a series of roads from Cincinnati to New Orleans. The Cincinnati, 
New Orleans & Texas Pacific owns no track, but operates under 
lease the Cincinnati Southern, which is owned by the City of 
Cincinnati. In 1901 the existing lease was extended 60 years, 
the rental under renewal being $1,050,000 annually for the first 
twenty years. 

The road is controlled by the Southwestern Construction 
Company, in the joint interest of the Southern Railway and the 
Cincinnati, Hamilton & Dayton, and operates a total of 336 
miles, from Cincinnati to Chattanooga. As of June 30th, 1906, 
it had outstanding the following securities : 

Common stock $3,000,000 

Preferred Stock 2,000,000 

Equipment Trust Obligations 2,926,288 

5% Gold Notes 1,500,000 

Total Capital $9,426,288 

For the year 1906 the road showed : 

Gross Earnings $8,454,896 

Net Earnings 2,062,224 

During the year $440,825 was put into permanent improve- 
ments, which revert to the lessor company at the conclusion of 
the lease. 

On traffic density amounting in 1906 to 2,650,162 ton 
miles there was expended for maintenance of way, $4,900 per mile 
and for maintenance of equipment, $4,274 per mile. This high 
standard of charges was not greatly above that obtained 
on the road for several years. This is more than three 

(240) 



CINCINNATI, NEW ORLEANS & TEXAS PACIFIC 241 

times the average maintenance of the Louisville & Nashville, 
the Illinois Central and the Chicago & Alton, and with a traffic 
density of about two and one-half times as great as these roads, 
i'. would appear that this maintenance charge is extremely liberal, 
and probably conceals considerable earnings. 

After the payment of fixed charges and the permanent im- 
provements, there remained a balance of income over charges of 
$387,764. If the excess of maintenance represented no more 
than $2,000 per mile, this nominal surplus could have readily 
been increased to in the neighborhood of $1,000,000. This, over 
the 5% dividends on the preferred, would have left $900,000 
available for dividends on the $3,000,000 of preferred stock, or 
the equivalent of about 30%. 

It will be seen, therefore, that the 5% dividend paid on the 
common stock in 1906 was very amply protected and might 
readily have been doubled or tripled. 

The preferred stock is 5% cumulative but without voting 
rights. It is apparently as amply protected as to its dividend as 
any stock on the market. 



16 



CLEVELAND, CINCINNATI, CHICAGO AND 
ST. LOUIS RAILWAY. 

The "Big Four," as it is familiarly known, is the western- 
most member of the New York Central-Lake Shore group of 
roads, and extends the system from Cleveland westward and 
southward to Cincinnati, Indianapolis, Peoria, St. Louis, and 
Cairo. It has long been a member of the Vanderbilt system, 
but was formerly operated by a somewhat separate set of 
officers. With the retirement of M. E. Ingalls as president, its 
chief executive officers are now the same as for the rest of the 
system. In 1906 it operated 1,983 miles of main track through Ohio, 
Indiana, and Illinois, with 218 miles of second track. 

History. 

The road represents the consolidation in 1889 of the Cincin- 
nati, Indianapolis, St. Louis and Chicago, the Cleveland, Col- 
umbus, Cincinnati and Indianapolis, and the Indianapolis and 
St. Louis railroads. The reorganization took place in the Vander- 
b ; lt interest. In the following year the St. Louis, Alton and 
Terre Haute was absorbed, and later the Cincinnati, Sandusky 
and Cleveland and several other small roads, which extended 
the line to its present proportions. 

Ownership. 

A working control of the capital stock is owned by the 
Lake Shore, in the Vanderbilt interest, the Lake Shore holding 
Jan. 1, 1907, $23,148,100 of a total of $50,000,000 stock outstanding. 
The directorate was chiefly made up of Vanderbilt directors, as 
follows: William K. Vanderbilt, Frederick W. Vanderbilt, H. 
McK. Twombly, William H. Newman, and Chauncey M. Depew. 
The Chairman of the board is Melville E. Ingalls, long the presi- 
dent of the road, and the other directors of 1906 were James D. 
Layng, vice-president; J. Pierpont Morgan, Walter P. Bliss, 
James Barnett, and Alexander McDonald. Despite the fact that 

(242) 



CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS 243 

the majority portion of the stock is thus owned, the road had in 
1905, 1,965 shareholders. 

Affiliations. 

The Big Four is a direct feeder for the Lake Shore. Aside 
from its association with other Vanderbilt roads, the Big Four 
owns a majority of the $10,000,000 capital stock of the Peoria 
and Eastern Railroad, and guarantees the interest on that com- 
pany's bonds; owns a majority of the stock of the Cincinnati and 
Northern ; is part owner in various terminals at St. Louis and 
other points. Through the Peoria and Eastern it owns one 
fourth of the Peoria and Pekin Union Railway; and jointly 
with the Chesapeake and Ohio, it guarantees the interest on the 
Louisville and Jeffersonville Bridge bonds. As on January 1st, 
1905, it held stock in the Chesapeake and Ohio Railroad carried 
on the books at a valuation of $2,453,570. The Central Indiana 
Railway is jointly controlled by the Big Four and the Penn- 
sylvania. 

Capitalization. 

Including the increase of about $4,500,000 common stock, 
sold in 1906, the capitalization of the road Jan. 1, 1907, stood as 
follows : 

Common Stock $40,000,000 

Preferred Stock 10,000,000 

Total $50,000,000 

Funded Debt 63,612,727 

Total Capital $113,612,727 

Rentals capitalized at 4% 7,132,325 

Approx. gross capitalization $120,745,052 

Securities held 4,988,383 

Approx. net capitalization $115,756,669 

Approx. net capit. per mile $58,374 

Aver, miles operated 1,983 

Net earnings on net capital 5.3% 

Stock on net capitalization 43% 



244 CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS 

Fixed Charges on Total Net Income. . 69% 

Factor of Safety 31% 

The estimated capitalization per mile, $58,374, compares 
with $78,987 for the Lake Shore, $69,150 for the Wabash, and 
$101,311 for the Panhandle. 

Its net earnings on the estimated net capital were low, 
amounting to only 5.3%, as against 3.9% for the Wabash, 12.7% 
for the Lake Shore, and 6.6% for the Panhandle ; that is to say, 
its capitalization is high as compared with its earnings. 

The stock represents 43% of the estimated net capitaliza- 
tion, as compared with 41% for the Lake Shore, and 31% for 
the Panhandle. 

Fixed Charges in 1906 consumed 69% of the total net income, 
as against 38% for the Lake Shore and 54% for the Panhandle. 

The Factor of Safety on the underlying securities and guar- 
anties was not large. 

Equities. 

In 1906 stocks and bonds were owned of a book valuation of 
$4,988,388, the amount being unchanged from the previous year. 
The equities of the company in these holdings were small. 

Peoria and Eastern. 

For 1906, the Peoria and Eastern, owned by the Big Four, 
showed gross earnings of $2,165,771, a slight increase from the 
year before. The net earnings were $859,885, a slight increase, 
and the nominal surplus was $172,800, of which $150,000 was 
set aside for a special improvement fund. The road therefore 
returned to the Big Four nothing on the latter's stock owner- 
ship in the road. The Peoria and Eastern operated for the year 
1906, 352 miles of main road. 

Cincinnati and Northern. 

This subsidiary road operated 247 miles of road in 1906, 
showed gross earnings of $1,027,728, net of $228,124, and a 
surplus over first charges of $132,696, as against $4,673 in 1905. 
The surplus for 1906 equalled 4.4% on its $3,000,000 of capital 
stock, but no dividends were paid. 

Increase of Capitalization. 

In 1905 there was an authorized increase in the common 
stock from $28,700,000 to $40,000,000 and during 1905 and 1906 



CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS 245 

this stock was sold, the larger part being taken by the Lake 
Shore. The increase in the company's nominal capitalization 
over a period of 6 years was as follows : 



Year 


Common 
Stock 


Preferred 

Stock 

(5 per cent.) 


Funded 
Debt 


Total 


Gross 
Earnings 


1899-00 
1906 


$27,989,310 
40,000,000 


$10,428,997 
10,000,000 


$57,169,730 
63,612,727 


$95,588,037 
113,612,727 


$16,806,850 
24,594,916 



Net increase over six years : Nominal Capital, 18% ; Gross 
Earnings, 44%. 

In Oct., 1906, it was voted to increase the amount of common 
stock to $50,000,000, and the new $10,000,000 of stock was offered 
to stockholders at $90 per share. 

Character of Traffic. 

Passenger earnings were high, amounting in 1906 to about 
28% of the gross earnings. Bituminous coal represented more 
than a quarter of the freight tonnage, the balance of the com- 
pany's traffic being very evenly distributed between farm pro- 
ducts, products of mines and manufactures. 

Stability of Earnings. 

In ten years the company has shown a handsome increase 
in earnings from $7,455 per mile in 1895-6 to $12,402 in 1906. 
This increase was very even and showed no setback from year 
to year within the period named. The details are as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


1,838 


$13,702,535 


$7,455 


1896-7 


1,838 


13,117,111 


7,136 


1897-8 


1,838 


14,320,094 


7,796 


1898-9 


1,838 


14,719,363 


8,008 


1899-00 


1,891 


16,806,851 


8,887 


1900-1 


1,891 


17,877,489 


9,454 


1901-2 


1,891 


18,717,071 


9,898 


1902-3 


1,891 


20,390,701 


10,783 


1903-4 


1,891 


21,069,954 


11,142 


1905* 


1,893 


22,517,763 


11,355 


1906 


1,893 


24,594,916 


12,402 



*Fiscal year changed. 



246 CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS 

Maintenance. 

In the six and one-half years embraced in the following 
table it will be seen that the traffic density did not increase 
rapidly, — about 25%, while the total maintenance charges rose 
from $2,566 per mile to $3,459, or about 36%. 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1905 

1906 

Average 


1,009,564 
1,064,192 
1,086,783 
1,029,851 
1,156,591 
1,284,311 

1,105,215 


$1,197 
1,329 
1,525 
1,440 
1,512 
1,657 

$1,443 


$1,369 
1,496 
1,681 
1,628 
1,709 
1,802 

$1,614 


$2,566 
2,825 
3,206 
3,068 
3,221 
3,459 

$3,057 


Additio 


nal main track, 252 miles. 






Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




Wabash 

T. St. L. & W. . 

Alton 


880,032 
1,046,149 

959,668 
1,099,515 


$1,332 

996 

1,254 

1,371 


$1,370 

959 

1,630 

1,273 


$2,702 
1,955 
2,884 
2,644 







Comparing the expenditures of the Big Four over a series of 
years with other roads in the same section, of about the same 
traffic density, it will be seen that they were higher than any — 
considerably higher even than the Alton or the Vandalia, both of 
which have been very heavily maintained. It may be taken, 
therefore, that considerable earnings have been set aside for im- 
provements and charged to operating expenses. This conclusion 
is borne out by the fact that the surplus shown in 1906 and the 
two years preceding was less than in any of the three years back 
of that. It is evident that these improvements have been adjusted 
to income. 

The operating ratio for 1906 was 75%, the same as the pre- 
ceding year. There seems no good reason why the Big Four 
should not be operated for around 70% and if the surcharge of 
maintenance be reckoned at no more than 4% of gross income, 
this would add around $1,000,000 to the nominal surplus shown. 

Aside from these heavy maintenance charges, the following 
sums were deducted from surplus for improvements in the years 
named : 



CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS 247 



1900-1 $567,852 

1901-2 600,371 

1902-3 311,263 

1903-4 1,000,000 

No similar appropriations were made from surplus in either 
1905 or 1906. 

Surplus. 

Under the conditions indicated above the nominal surplus 
shown over a series of years has been as follows: 







Dividends 


Per cent. 


Dividends 




Year 


Surplus 


on Preferred 


Earned on 


Paid on 


Average 






Stock 


Common 


Common 


Price 


1899-00 


$2,273,982 


5 


6.3 


3 


53 


1900-1 


2,332,542 


5 


6.5 


3 


72 


1901-2 


2,250,860 


5 


6.3 


3* 


99 


1902-3 


2,029,979 


5 


5.5 


4 


79 


1903-4 


1,639,457 


5 


4 


4 


79 


1905* 


1,870,424 


5 


3.8 


4 


99 


1906* 


2,064,731 


5 


3.8 


4 


99 



*Calendar year. 

It will be noted that in neither 1905 or 1906 did the per- 
centage of surplus remaining for the common, equal the full 4% 
dividend paid, when reckoned on the full amount of stock out- 
standing at the close of the year. On account of the increase of 
$7,000,000 in 1905 and about $4,500,000 in 1906 the surplus was 
actually sufficient to pay the 4% dividend and leave a small re- 
mainder. 

Dividend Record. 



Over a series of years the dividends paid have been as fol- 
lows: 

Year. 

1891-07: Preferred 

Common. 

1883 

1890 

1891-3 

1894-9 

1900 

1901 

1902-7 



Dividends. 

5% Yearly 



3 and 1 extra. 
3 



3 

4 



248 CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet showed: 

Current Assets $6,031,366 

Current Liabilities 14,153,434 

Leaving a debit balance of $8,122,068 

The item of loans and bills payable at the close of the year 
was $5,615,925, almost the whole of which was created during 
the year. It is evident from the above showing that the com- 
pany was in need of working capital. The various items of cash 
totaled $2,712,759, while the credit to profit and loss was $1,- 
673,234. 

Investment Value. 

The Big Four has profited in no very material way by the 
Community of Interest plan. Its average freight rates in 1899 — 
the bed-rock year — were .54c per ton mile and .59c in 1906. This 
was an increase of less than six-tenths of a mill per ton mile and 
this on the company's traffic for 1906 would have represented a 
difference in the gross earnings of only about $1,000,000. The 
earnings of the road may therefore be regarded as solid and it 
has already been noted that its maintenance charges were heavy 
and especially so in 1906. 

The preferred stock has paid its full 5% dividend, with the 
exception of two years, since 1891. It sold as high as $124 per 
share in 1902, declining to $100 in 1903 and rising to $118 in 
1906. The amount of stock outstanding is not large and the 
dividend requirement of $500,000 should easily be met even in 
times of severe stress. 

Four per cent, has been paid upon the common since 1902. 
In the latter year it sold as high as $108 per share, declining to 
$66 in the year following, rising to $111 in 1905, falling again to 
$63 per share in March of 1907. 

If it be reckoned that around $1,000,000 of earnings were 
concealed in maintenance charges in 1906, the surplus for that 
year equalled about 7% for the common stock, so that in reality 
there was a fairly safe margin for the 4% dividend. But the 
balance sheet showed that the company was in need of working 
funds and that its current liabilities had shown a heavy increase 
through 1906. By reference to the capitalization account, it will 



CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS 249 

be seen that the fixed charges are already very high, nearly 
70%, so that the road was in no position for further bond issues 
and in 1905-6 it could only sell its common stock at a discount 
of 10%. 

In October, 1906, it was voted to increase the common stock 
from $40,000,000 to $50,000,000, the new stock being offered to 
stockholders at $90 per share. But this proposed issue was not 
well received. 

When new stock must be sold at a discount, it is fairly evi- 
dent that there is no immediate prospect for an increase in divi- 
dends. It is not very clear, therefore, that this 4% common 
stock should sell on a much higher basis than some of the 4% 
preferred stocks like the M. K. & T., etc. But purchased at some- 
thing like the low price of 1907, it should in time show an at- 
tractive profit to the holder. 



CLEVELAND, LORAIN AND WHEELING 

RAILWAY. 

The Cleveland, Lorain & Wheeling Railway is a small coal 
road operating 194 miles of track between a point opposite 
Wheeling, W. Va., to Lorain on Lake Erie, with a branch to 
Cleveland. It is a part of the Baltimore & Ohio system and 
largely owned by that road, but separately operated. In 1904 
the Baltimore & Ohio owned $3,012,700 out of the $5,000,000 of 
preferred stock outstanding and $6,760,600 out of the $8,000,000 
common stock. The directorate of the road is made up in the 
B. & O. interest. 

As of June 30th, 1906, the capital account stood as follows : 

Common stock $8,000,000 

Preferred stock. 5,000,000 

Funded Debt 6,843,000 

B. & O. loan 3,486,833 

Total Capital $23,329,833 

Total Capital per mile $120,254 

On a traffic density of 3,350,053 ton miles the company spent 
an average of $3,311 per mile for maintenance of way in 1906 and 
$3,108 for maintenance of equipment. It is to be remembered 
that the larger part of the traffic of the road is the haulage of 
soft coal and ores and the passenger business of the road is very 
slight, amounting to only about 6% of the gross earnings, so that 
the total expenditure of $6,419 undoubtedly represented very 
ample maintenance, if not more. 

On this basis of maintenance the road showed in 1906 : 

Gross Earnings $3,480,256 

Net Earnings 935,660 

Fixed Charges 559,505 

Surplus , 379,090 

(250) 



CLEVELAND, LORAIN & WHEELING 251 

The net earnings of 1906 were equivalent to about 4% on 
the capitalization of the road. In other words the capitalization 
is high. Fixed charges consumed 60% of the total net income. 
There remained a surplus sufficient to pay the full 5% on the 
$5,000,000 of preferred stock and show a balance of 2% on the 
common stock. 

The full 5% was paid on the preferred in 1906 and likewise 
in 1905. In 1904, 2y 2 % was paid. None previously since 1896. 

The indebtedness to the Baltimore & Ohio Railroad for ad- 
vances during the year increased by only $28,816. In other 
words, the road in 1906 had practically ceased to borrow. 

Although there was a considerable increase during 1906 of 
tonnage, the cost of conducting transportation for the year de- 
creased by $55,034, showing that the considerable improvements 
made in the property and the liberal sums devoted from earnings 
to improvements were bearing their fruit. 

In view of payment of dividends on the preferred stock, it 
is obvious that the indebtedness to the Baltimore & Ohio will not 
be directly repaid, but funded, and should no serious depression 
come to the coal industry, the company should be able to con- 
tinue payment of the full 5% on the preferred stock. This stock 
sold during 1906 at from $105 to $112 per share. It is non- 
cumulative. 

The prospect for dividends on the common seem rather re- 
mote, for while maintenance charges in the years previous to 
1906 undoubtedly carried considerable earnings devoted to im- 
provements, the rise in the cost of labor and supplies have been 
such that probably the charges of 1906 were not greatly above 
the normal demands of the property. If, however, the road 
should continue to increase its earnings (it has more than doubled 
its gross income since 1899), it is obvious that the surplus would 
soon be sufficient to permit of dividends on the common. 

Evidently in anticipation of such an event the common sold 
at from $85 to $100 per share in 1906. It did not appreciably 
decline in March of 1907. Such prices, with interest rates at the 
1906 level, could hardly have been justified on the expectation of 
less than a 6% dividend. Even supposing that 25% of the main- 
tenance charges for 1906 represented surcharge, this would have 
increased the surplus by only about $300,000, which, added to the 
$379,000 surplus shown, would have given a surplus of $679,000. 
Dividing this equally between dividends and improvements, the 



252 CLEVELAND, LORAIN & WHEELING 

amount remaining over the payment of the 5% on the preferred 
would have been less than 2%. 

With its earnings pivoted upon the prosperity of a single 
industry, and that industry extremely sensitive to general con- 
ditions, it is evident that there were many other stocks on the list 
which represented a far more attractive purchase at the price. 



COLORADO AND SOUTHERN RAILWAY. 

The Colorado and Southern, through its extensions to Gal- 
veston, will take on an importance that it has hitherto lacked. 
It belongs to the Hawley group of roads, and operates a line ex- 
tending from Denver, southeasterly to Fort Worth, with several 
branch lines westward from Denver through central and south- 
ern Colorado. It also owns a line from Cheyenne to Orin Junc- 
tion on the North Western line in Wyoming, and operates from 
Denver to Cheyenne under trackage rights over the Union 
Pacific. 

The road represents a reorganization in 1899 of the Union 
Pacific, Denver and Gulf, which was in turn a consolidation in 
1890 of the Colorado Central, the Denver, Texas and Fort Worth, 
and several Union Pacific lines. Up to the time of the Union 
Pacific's bankruptcy, the Denver and Gulf was controlled and 
operated by that road, and the subsidiary line followed its pa- 
rent into bankruptcy in 1893. 

The Colorado and Southern took over as an asset from the 
bankrupt company practically all the stock of the Fort Worth 
and Denver City, owning a line from Texline to Fort Worth, 
Texas. It sold off its Julesburg branch to Lacelle, Colorado, to 
the reorganized Union Pacific, and secured its traffic rights from 
Denver to Cheyenne in exchange. During the year of 1906, the 
Colorado Springs and Cripple Creek District railway, 75 miles 
long, was added, together with another short piece of rail, and 
beginning with this year the accounts of the Colorado and South- 
ern, the Fort Worth and Denver City, and the subsidiary roads 
were consolidated into the Colorado and Southern system, in- 
stead of presenting separate reports as hitherto. 

In 1906 the road sold a half interest in its Trinity and 
Brazos Valley railway to the Rock Island Company, the latter 
assuming one-half of the guarantees as to interest, etc. The 
Brazos Valley extends to Houston, Texas, and has trackage 
rights from there to Galveston over the Gulf, Colorado and Santa 

(253) 



254 COLORADO & SOUTHERN 

Fe. The report states that this will provide the shortest through 
line between the Colorado section and tidewater. It notes fur- 
ther that Galveston is almost exactly on the same meridian as 
Kansas City and that exports through Galveston already rank 
next in value to those through New York. 

By the completion of another short line and trackage rights, 
the Colorado and Southern will also have the shortest line be- 
tween Dallas and Galveston, and likewise between Fort Worth, 
and Galveston. With the extensions which are planned from 
Wichita Falls south to Abilene, Texas, the Colorado and South- 
ern will operate approximately 2,250 miles of railroad. 

The main interest of all this lies in the fact that the road 
is popularly supposed to be held for sale at some future time to 
one of the larger railway systems, among which the Rock Island 
and the Union Pacific have been mentioned. Indeed it was sup- 
posed, when in 1905 B. F. Yoakum entered the directorate and 
became a member of the executive committee of the Colorado 
Southern, that this indicated a close working alliance with the 
Rock Island, this idea being further confirmed by the construc- 
tion of the Brazos Valley line to Galveston. In addition to this 
joint line to the south, the Colorado and Southern also owns one 
half of the Colorado Midland Railway, jointly with the Rio Grande 
Western — i.e., the Denver and Rio Grande. The Colorado Midland 
extends from Denver and Colorado Springs to Grand Junction, 
and operates 334 miles. With the completion of the Western 
Pacific, the Colorado and Southern will form with the Gould lines 
another through line from San Francisco to the Gulf, thus in- 
jecting a new element of competition with the Harriman lines. 

Again, the Colorado Southern joins the Burlington lines at 
Denver, and likewise in Wyoming, and it would require but a 
small piece of track to reach from Orin Junction, the northern 
terminal of the Colorado and Southern lines, to the Burlington's 
main line through to Billings, Montana, thus joining up a route 
from the Hill lines to the Gulf. This latter route would be very 
considerably shorter for the cotton traffic which the Hill lines 
now draw from Texas via Kansas City. 

Still again, this same short extension would join the Colorado 
and Southern with the St. Paul's Pacific extension, so that by 
reason of its peculiar lie, the road offers an interesting number 
of possibilities of combination. 



COLORADO & SOUTHERN 255 

The Hawley interests acquired control of the property in 
1902. The executive committee includes Grenvilk M. Dodge, the 
veteran builder of the Union Pacific Railway, and former presi- 
dent of the Union Pacific, Denver and Gulf; Edwin Hawley, 
president of the Minneapolis & St. Louis, etc. ; John J. Emery, also 
a director in the Toledo, St. Louis and Western, vice-president of 
the Dayton and Michigan, etc. ; Benjamin F. Yoakum, chairman 
of the board of the Rock Island Company, and the operating head 
of that system ; and Hans Winterfeldt, of Hallgarten and Com- 
pany, bankers, New York. The other directors were : Henry E. 
Huntington, associated with Mr. Hawley in other enterprises, 
heavily interested in traction companies in Los Angeles, etc. ; 
James N. Wallace, president of the Central Trust Company, 
New York, also a director in the National Railroad of Mexico ; 
Henry Walters, chairman of the boards of both the Atlantic Coast 
Line and of the Louisville and Nashville ; Norman B. Ream, 
prominent in the affairs of the Erie, also a director in the Balti- 
more and Ohio, the Seaboard Air Line, etc. ; Harry Bronner, 
secretary of the Colorado Midland ; Henry Budge, formerly vice- 
president of the Clover Leaf; W. S. Crandall, New York; and 
Frank Trumbull, president, Denver, Colo. 

Capitalization. 

Including the small amount of Fort Worth and Denver City 
stock outstanding, the capitalization of the road on June 30th, 
1906, stood as follows : 

Common stock $31,000,000 

1st Preferred 8,500,000 

2nd Preferred 8,500,000 

Total stock $48,000,000 

Funded debt 41,233,637 

Equipment lease 624,000 

F. W. & D. C. Stock 625,965 

Total capital $90,483,602 

Securities held 4,592,316 

Approx. net capitalization $85,890,286 



256 COLORADO & SOUTHERN 

Approx. net capital per mile $51,647 

Average miles operated 1,663 

Net earnings on net capital 4.3% 

Stock on net capitalization 56% 

Fixed Charges on Total Net Income 55% 

Factor of Safety 45% 

On the four and a half millions of securities held, the road 
derived in 1906, only $83,913 of income, or less than 2% on the 
book valuation of these holdings. The total amount, however, 
is small, and does not greatly affect the calculations. 

It will be seen that the approximate net capitalization is high. 
The average of $51,647 per mile compares with an average of 
about $30,000 per mile for such standard roads as the Burlington, 
the North Western and the St. Paul. 

This fact of over-capitalization is further reflected in the 
showing of net earnings on net capital, the net earnings showing 
only 4.3% in the very exceptional year of 1906, when the net 
earnings made a jump of nearly 50% over the year preceding. 
The showing of net earnings on net capitalization in 1905 was 
rather less than 3%. This was against an average of from nine 
to ten per cent, for the three western roads named above. The 
larger part of this very liberal capitalization is, however, repre- 
sented by stock, on five-sixths of which no dividends, up to 1906, 
had ever been paid. 

On the very favorable showing of 1906, the Fixed Charges 
consumed 55% of the total net income, leaving a nominal Factor 
of Safety of 45%. It will be noted, however, that this was quite 
abnormal. In the preceding year, before the accounts of the two 
subsidiary lines were consolidated, the Fixed Charges on the 
Colorado and Southern proper (about two-thirds of the system), 
consumed 65% of the total net income, leaving a margin of 
safety of only 35%. 

Of the securities held in 1906 the principal items were $2,- 
922,000 Trinity and Brazos Valley first mortgage bonds, and a 
half interest in the Colorado Midland stock, amounting to $1,- 
710,100 par value of the common, and $2,477,400 of the preferred. 
In recent years that road has chiefly earned a deficit. 

The capital stock of the Colorado and Southern has not been 
increased since the organization of the company in 1899, but the 
funded debt has risen rather rapidly. That of the Colorado and 



COLORADO & SOUTHERN 



257 



Southern proper amounted in 1900 to $17,603,000, with a small 
amount of car trust notes, and for the Fort Worth and Denver 
City, to $2,036,500, or a total of $19,639,500. On June 30th, 1906, 
the funded debt of the system was $41,233,639, an increase of 
$21,604,139. 

Of this increase, $3,439,000 was added by the inclusion of 
the Colorado Springs and Cripple Creek District Railway in 
1906, leaving a net increase for the bonded debt of the system in 
six years, of $18,165,139, an increase of nearly 100%. In the same 
period the gross earnings of the Colorado and Southern-Fort 
Worth lines rose from about $6,200,000 (the fiscal years of the 
two roads did not coincide, so that the sum has to be estimated) 
to $11,653,445 in 1906. In other words, roughly speaking, the 
increase of funded debt and gross earnings have about kept even 
pace, the difference of debt rather exceeding the increase of earn- 
ings. 

Stability of Earnings. 

Of the tonnage of the road in 1906, farm products formed 
16% of the total, with coal 30%, lignite coal 11%, precious ores 
10%, the balance being distributed over the usual variety of 
traffic. All told, products of mines made up two-thirds of the 
tonnage of the road, but contributed less than half of its gross 
freight earnings. 

Up to 1903, the Fort Worth and Denver City reported for 
the calendar year and the Colorado and Southern for a fiscal year 
ending June 30th. The following table shows the mileage 
and earnings of the Colorado and Southern proper from the first 
year of its reorganization to the close of 1902, the total earnings 
of the Colorado and Southern-Fort Worth line in 1903 and 1904, 
and the years of 1905 and 1906 include also the operations of the 
Colorado Springs, and Cripple Creek District road. 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1899-0 

1900-1 

1901-2.. 

1902-3 

1903-4.. 

1904-5 

1905-6 


1,142 
1.142 
1,133 
1,575 
1,574 
1,646 
1,663 


$4 ,237 ,743 
4,794,649 
5 ,580 ,327 
8 ,637 ,676 
8,199,305 
9 ,443 ,426 

11,653,445 


$3,710 
4,200 
4 ,925 
5,487 
5.205 - 
5,733 
7.006 



17 



258 



COLORADO & SOUTHERN 



Under the conditions noted above, the comparisons are o$ 
value only since 1903. The earnings for that year showed a very 
considerable increase over the earnings for the year before, and 
over any preceding year of the company's history, the mileage 
earnings amounting to very nearly $5,500 per mile. These earn- 
ings slumped somewhat in the year succeeding, but rose rapidly 
in 1905, and still more so in 1906. In the latter year gross earn- 
ings of the system increased 23%, and net earnings 48%, and 
taxes remaining about the same, the Total Net Income available 
for charges and dividends rose from $2,212,000 to $3,439,000, an 
increase of 60%. 

This was a quite astonishing jump, and unfortunately the 
change in the methods of reporting the earnings of the system 
makes it impossible to find out whence this heavy increase of 
business was derived. There was a slight reduction in the aver- 
age rate per ton mile, of from 1.07c to 1.02c, this being com- 
pensated by a considerable rise in the trainload from 247 to 271 
tons, so that the freight earnings per freight train mile, rose 
from %2.66 to $2.79. 

Maintenance. 

Since the average freight earnings per mile remained about 
the same, it follows that the increase of traffic density was about 
the same as the increase of gross earnings per mile; it was, in 
other words, about 23% ; by comparison with the previous year it 
will be seen that this considerable increase of traffic was carried 
with about the same charges for maintenance of way as for the 
preceding year. There was, however, very considerable increase 
in the charges for maintenance of equipment. The charges for 
several years compare as follows: 







Maintenance Der Mile 






Traffic Density 






Total 












Way 


Equipment 




1900-1 


269 ,859 


$611 


$557 


$1,168 


1901-2 


318,278 


840 


650 


1 ,490 


1902-4 


400 ,991 


887 


815 


1,702 


1903-3 


299,484 


865 


826 


1,691 


1904-5 


394 ,749 


1,148 


788 


1,936 


1905-6 


503 ,778 
364 ,523 


1,178 


913 

$758 


2 ,091 


Average 


$921 


$1,679 




577 ,005 


$1,123 


$1,113 


$2,236 


Burlington 


580 ,024 


1,104 


1,032 


2,136 


Missouri Pacific 










(Aver. 2 years) 


623 ,807 


819 


821 


1,640 



COLORADO & SOUTHERN 259 

The equipment charges for the two years were : 

1905. 1906. 

Locomotives $2,503 $2,509 

Freight cars 61 66 

Passenger cars........ 632 831 

It is to be further remembered that 387 out of 1,663 miles 
of the system was narrow gauge track, with a correspondingly 
lighter equipment and lessened wear and tear, so that an aggregate 
maintenance charge of $2,091 per mile in 1906 was probably 
adequate, although it was not up to the same standard as the 
preceding year, but it compares very favorably with that of the 
Burlington and the Atchison, which in 1906 were both very 
heavily charged. 

. On the other hand, the Atchison, for example, has set aside 
heavy sums for improvements annually from earnings in ad- 
dition ; but on the Colorado and Southern such charges have 
been made to operating expenses directly and there have been 
no additional appropriations. 

Surplus Earnings. 

In the following table is shown the amount of surplus avail- 
able for dividends and improvements for the Colorado and South- 
ern proper up to 1906, and for the entire system for the latter 
year. The actual difference in the preceding years was not large, 
the surplus on the Fort Worth and Denver City line in 1905 
amounting to only $6,354. 







Dividends 


- 
Per cent. 


Per cent. 


Average 


Year 


Surplus 


Paid on 1st 


Earned on 


Earned on 


Price 1st 






Preferred 


1st Prefer'd 


2nd Prefer'd 


Prefer'd 


1900-1 


$405 ,648 


3i 


4.7 


.77 


50 


1901-2 


626 ,759 


34 


7.3 


3.37 


69 


1902-3 


496 ,953 


4 


5.8 


1.84 


58 


1903-4 


437 ,841 


2 


5.1 


1.15 


55 


1904-5 


610,315 


r-\ . 


7.1 


3.18 


61 


1905-6 


1,766,212 


4 


20.7 


16.7 


70 



With the very heavy increase of earnings in 1906, and with 
no corresponding increase in the operating charges, the surplus 
for the' year was very nearly 200% higher than in the year pre- 
ceding, so while in 1905 the road paid no dividends on any of its 



260 COLORADO & SOUTHERN 

stock, and earned only 7% on its first preferred, its showing in 
1906 was equivalent to the full 4% on both classes of preferred 
stock, and 3% additional on the common. 

The only class of stock on which any dividend had been de- 
clared up to 1906 was the first preferred, which has paid as fol- 
lows: 

% 
1900 2 

1901 sy 2 

1902 sy 2 

1903 4 

1904 2 

1905 

1906 4 

In 1907 an initial dividend of 2% was declared on the 2nd Pref. 

The Balance Sheet. 

At the close of the fiscal year of June 30th, 1906, the balance 
sheet showed : 

Current assets $1,997,487 

Current liabilities 1,254,322 

leaving a working balance of $743,165 

There was in addition to the current liabilities, $725,310 of 
deferred liabilities, accrued taxes, interest etc., bringing the total 
liabilities up to $1,979,632. 

The item of cash amounted to $1,146,568, and the balance to 
the credit of Profit and Loss was $3,246,291. 

The road also had assets in special funds to the amount of 
$244,275, and had advanced to subsidiary companies, $1,048,639. 

Investment Value. 

Both the first and second preferred are entitled to 4% divi- 
dends, non-cumulative. It will be seen from the table of surplus 
earnings that the full 5% has been earned on the first preferred 
since 1900, and that in the exceptional year of 1906 there was a 
very large balance remaining. In 1906, prices on this stock 
ranged between $66 and $73 per share. This low price was un- 
doubtedly occasioned by the passing of the dividend in 1905. 
The dividends were resumed in 1906 on this stock, and there 



COLORADO & SOUTHERN 261 

seems no reason why this stock should not eventually sell at 
from $80 to $90 per share, or possibly even higher, should there 
be no heavy decline in railway values generally. 

The full dividend on the second preferred had never been 
earned, save in the single year of 1906. In that year it sold be- 
tween $43 and $58 per share. In March of 1907, an initial dividend 
of 2% was declared. Should the road continue to show anything 
like the earnings of 1906, this stock would be put upon its full divi- 
dend basis, and would then be entitled to sell around $70 to $80 
per share. 

The price of both these stocks has been somewhat depressed 
from the fact that in 1905 the road determined upon the creation 
of a refunding and extension mortgage to the amount of $100,- 
000,000. During the fiscal year of 1906 bonds of this issue were 
put out to the amount of $11,372,032, of which $2,958,395 was 
applied to betterments, improvements and to reimbursing the 
treasury for additions to equipment; while the balance, $8,413,637, 
was set aside for the payment of various securities, including 
$1,999,100 par value of the stock of the Colorado Springs and 
Cripple Creek Railroad. 

This was a heavy issue for this road, and indicates the 
policy of expansion upon which the management has embarked. 
Owing to its load of stock, this road can only extend through the 
increase of its fixed debt, and this fact will tend to make its 
securities sell in general below . their actual worth until very 
definite results in increased business have been shown. 

On the other hand, the $17,000,000 of preferred stock repre- 
sents more than one-third of the outstanding capital stock and 
would share to some extent in the somewhat artificial value given 
to the stock by the fact that this road is thought to be coveted 
by other large systems. 

The amount of common stock, $31,000,000, is, compared to 
the earnings and the capitalization, enormous. Nothing was ever 
earned on his stock until 1906, when the surplus showed a 
nominal 3% after maintenance charges that were undoubtedly 
adequate, if not much more than that. If these earnings can be 
maintained, it is easy to see that the stock would very soon 
acquire a solid value. On a 5% basis the net earnings for 1906 
would give a valuation of $75,000,000 to the road, which, after 
deducting $60,000,000 of stock and preferred bonds, would leave 



262 COLORADO & SOUTHERN 

$15,000,000 for the $31,000,000 of common. In an interview 
President Hawley stated that control of the road would not pass 
at under $40 a share for the common stock. 

But a controlling interest, it is needless to say, is worth very 
much more ; than the floating supply available to the public for 
investment purposes. In 1903 the common sold as low as $10 per 
share ; but its earnings have increased so extensively since this 
time that this affords little indication as to what the stock might 
sell at on any considerable recession of prices. In the general 
slump of 1907 the stock did not sell below $22 per share. 

This stock, it goes without saying, is a pure speculation, and 
it is to be noted that it requires less than half of the common 
stock, added to the whole amount of the preferred to insure con- 
trol. In 1906 Colorado showed an amazing prosperity, in which 
the road shared in the fullest degree. The greatest development 
of the state is now in agriculture, and its mining has now fallen 
behind the value of its agricultural products. Should the price 
of silver continue to advance, this would mean renewed activity 
in silver mining, and there is no state in the Union which would 
benefit more from this than Colorado. 

Again, supposing that the extension to the Gulf, with pos- 
sible extensions to the north and the connection which will be 
afforded by the new Western Pacific, should reap the harvest 
which the management hopes, the Colorado and Southern would 
show a large increase in traffic. 

As an investment, the preferred stock offers a far greater 
degree of solidity than the common, and at the prices of 1907 it 
would seem that these stocks were relatively low. The investor 
in common would obviously be speculating upon the successful 
outcome of the expansion policy, and this outcome depends more 
or less upon the continuance of the amazing prosperity, not to 
say boom, which the Southwest has enjoyed within recent years. 
This development, alike in the settlement of the country and in 
the rapid construction of new lines of railroad, was in many re- 
spects paralleled by the expansion of the Northwest in the 
eighties, and the cautious investor will not fail to bear in mind 
the possible consequences of its being overdone. 



DELAWARE AND HUDSON COMPANY. 

The Delaware & Hudson is one of the anthracite coal roads 
and operates a line from Wilkesbarre, Pa., to Albany and Troy 
on the Hudson, and northward, to the Canada line and into the 
Adirondacks, with a total of 843 miles. 

By purchase of the control of the Quebec, Montreal & South- 
ern and the proposed extension of that line eastward to Quebec, 
the company will add 280 miles to its line and will have the 
shortest road between Quebec, Montreal and New York and be- 
tween Quebec and Montreal. This will give the lines of the 
company direct connection with all the important railroads in 
eastern Canada and will enable it to serve numerous paper mills 
located along its lines with the supply of wood pulp necessary 
for their operation. 

Like the New Haven road, the Delaware & Hudson has 
also made extensive purchases in traction lines. It owns the en- 
tire capital stock of the United Traction Co. which operates 83 
miles of electrical lines in Albany, Troy and the vicinity, and this 
company in turn has control of the Hudson Valley Railway 
Company, operating 129 miles of electric road extending north- 
ward to Warrensburg. 

The Delaware & Hudson Company is one of the oldest organi- 
zations of the country, the old Delaware & Hudson Canal Com- 
pany having been chartered by the New York State legislature in 
1823 for the purpose of constructing a canal from the coal fields 
of Pennsylvania to the Hudson River at Rondout, N. Y. The 
Gravity Railroad was completed in 1829. The present name 
of the company was adopted in 1900, and at the same time it was 
authorized to sell the canal and purchase its own securities for 
sinking fund purposes. The Gravity Railroad was brought up to 
standard gauge and opened for regular business in February, 
1900. 

The company owns extensive anthracite coal fields with un-' 
mined coal estimated by the government at 260,000,000 tons, and 

(263) 



264 DELAWARE & HUDSON 

by the company itself (January 1st, 1907) at 207,801,964 tons. 
Up to 1906 the company derived a larger income from its coal 
tonnage, including therein the amount charged its Sales Depart- 
ment, than from all its other tonnage combined ; but the mer- 
chandise tonnage has been rising steadily, while the coal ton- 
nage has for several years remained about stationary, and for 
1906 the earnings from coal were slightly less than from general 
freight. 

Ownership. 

No distinct interest is recognized in control of the road, al- 
though the Mutual Life and Equitable Life interests were for- 
merly prominently represented on its directorate. The Mutual 
Life was in 1906 still represented by Charles A. Peabody, Presi- 
dent, and Frederic Cromwell, Treasurer. The company had 
3,819 shareholders of record in 1905. 

In 1906 its board of managers consisted of Robert M. Oly- 
phant, Chairman, formerly its president ; Alexander E. Orr Presi- 
dent of the New York Life Insurance Company; Chauncey M. 
Depew, of the New York Central RR. ; John Jacob Astor ; David 
Willcox, its president; R. Suydam Grant; George I. Wilber; 
Dumont Clarke, President of the American Exchange National 
Bank; James A. Linen, Scranton, Pa. ; William S. Opdyke, gen- 
eral counsel of the road, and E. H. Harriman, President of the 
Union Pacific. In 1907 Mr. Willcox resigned as president of the 
D. & H. and was succeeded by Leonor F. Loree, Chairman of the 
Executive Committee of the Kansas City Southern, and formerly 
president of the Rock Island, and the Baltimore & Ohio. 

Until its purchase of the Hudson Valley and other traction 
lines, the Delaware & Hudson had no holdings other than in its 
underlying companies, nor are other roads known to be very 
large holders of its stock. It belongs in a general way to the 
combination of railroads which has done away with rate wars, 
but beyond this it is considered an independent line. 

Capitalization. 

Since the Delaware & Hudson gives in its report a list of the 
underlying securities, it is possible to make up its capital sheet 
from the company's own figures. As of January 1st, 1907, this 
stood as follows: 



DELAWARE & HUDSON 265 

Stock $40,989,000 

Funded Debt 22,450,000 

Nominal capital $63,439,000 

Underlying stocks and bonds 47,344,000 

Gross capitalization $110,783,000 

Securities held 25,679,447 

Coal property 13,436,561 

Approx. net capitalization $71,666,992 

Approx. net capit. per mile $85,014 

Average miles operated 843 

Net earnings on net capital 9.4% 

Stock on net capitalization 56% 

Fixed Charges on Total Net Income 40% 

Factor of Safety 60% 

In 1906 the Delaware & Hudson paid approximately $2,- 
500,000 on the $47,344,000 of underlying securities. This was 
equivalent to an average of more than 5%. It follows, therefore, 
that had the amount paid been capitalized on a 4% basis as 
elsewhere in this book, the figure for gross capitalization would 
have been somewhat higher. This is to be borne in mind in 
comparison of the D. & H. with other roads. 

On the other hand, in its balance sheet the Delaware & Hud- 
son puts a valuation on its coal properties of $13,436,561 and this 
amount, together with securities held and advances to other 
companies has been deducted in order to approximate the net 
capitalization of the railway proper. After depreciation charges 
of 5c. per ton on coal produced, the Sales Department earned net 
$1,828,985 in 1904, $1,790,699 in 1905, and $1,049,498 in 1906, so 
that the company's valuation on its coal properties, equivalent to 
about 6c per ton on its own estimate of unmined coal, was low 
and its earnings on this amount were high. 

On the basis of the above estimate it will be seen that the 
approximate net capitalization is in the neighborhood of $85,000 
per mile and that the net earnings, excluding earnings of the coal 
department, showed 9.4% on this capitalization. This figure 
stands against a similar estimate of 8.1% for the Pennsylvania, 



266 



DELAWARE & HUDSON 



13.7% for the Lackawanna, 10.8% for the Reading and 5.8% for 
the New York Central. 

Stock represented more than one-half of the estimated net 
capitalization and fixed charges in 1906 consumed 40% of the 
total net, leaving a wide Factor of Safety for the underlying 
securities. 

Increase of Capitalization. 

In 1889 the company adopted the plan of setting aside a 
sinking fund of 5c. per ton on all the coal mined, the proceeds 
being used for the purchase and retirement of the capital stock 
of the road. By this means the capital stock had been reduced to 
$34,000,000 in 1903, but since then, stock increases, principally for 
the retirement of underlying bonds and the company's own 
debentures, have more than offset these purchases for the sink- 
ing fund. 

From 1900 to the close of 1906 the increase of capital and 
earnings compared as follows : 



Year 


Common 
Stock 


Funded 
Debt 


Total 


Securities 
Held 


Gross 
Earnings 


1900 


$34,793,200 
40,989,000 


$7,500,000 
22 ,450 ,000 


$42 ,293 ,200 
63 ,439 ,000 




$11,485,188 


1906 


24,013,866 


17 ,050 ,029 



Net increase over six years : Nominal capital, 50% ; gross 
earnings, 49%. 

To provide for the retirement of $7,000,000 6%, and $3,- 
000,000 7% bonds of the Albany & Susquehanna, $10,000,000 of 
3^2% bonds were offered to stockholders of the D. & H. at par 
in 1905. These bonds, like the $14,000,000 of Delaware & Hud- 
son debentures sold in 1906, are convertible into stock of the 
D. & H. at $200 per share. The conversion of all these securi- 
ties would add $12,000,000 to the capital stock of the road, at the 
same time reducing fixed charges by the amount of the interest 
paid. 

It will be seen that apparently the increase of capital was 
more rapid than the increase of earnings, but the larger part of 
the increase of capital went to the purchase of securities in other 
roads so that in reality the earnings increased about 50%, on a 
very slight increase of actual capital. 

On June 15th, 1906, debentures of the company were issued 



DELAWARE & HUDSON 



267 



to the amount of $14,000,000, more than tripling the nominal 
funded debt. Each debenture of $1,000, par value, is convertible 
into five shares of the stock of the company between 1907 and 
1912; that is, at an exchanging value of $200 per share for the 
stock of the company. In order to provide for such conversion, 
an increase of $7,000,000 in the stock of the company was 
authorized. The sums derived from these debentures were used 
chiefly in the purchase of new equipment, stock in the Quebec, 
Montreal & Southern, of traction lines, etc. 

Securities Held. 

The item of securities held includes a miscellany of stocks 
and bonds n f various small railroads and coal and iron companies. 
The interest on investments for 1906 amounted to $1,047,863, 
which was about 4% on the book valuation of the securities. 
There were no considerable equities in these holdings, save possibly 
in some undeveloped iron properties. 

Stability of Earnings. 

In 1906 the coal traffic contributed 57% of the total freight 
tonnage, as against 62% in 1905, 53% in 1904, 58% in 1903, 
44% in 1902 and 58% in 1901. The balance of freight traffic was 
distributed over a wide variety of items. In 1906 passenger earn- 
ings contributed 19% to the gross rail earnings. 

It will be seen from the above how vitally the prosperity of 
the road is bound up with the coal industry, and especially of 
anthracite mining. In 1902, in consequence of the strike, the 
gross rail earnings fell off $2,400 per mile, and the surplus avail- 
able for dividends decreased from 12.6% in 1901 to 7.2% in 1902, 
a drop of about 40%. 

Since this period the earnings have increased rapidly, the 
rail earnings amounting in 1906 to $20,225 per mile. The following 
table shows the rail earnings since the formation of the present 
company, the gross earnings of the coal department not being 
included in this table as is done in the company's reports : 



Year 



1900 
1901 
1902 
1903 
1904 
1905 
1906 



Miles 
Operated 



Gross 
Earnings 



660 
661 
689 
769 
843 
843 
843 



$11,485,189 
12,178,683 
11,050,690 
13 ,642 ,953 
15,071,124 
16,382,074 
17,050,029 



Earnings 
Per Mile 



$17,018 
18,424 
16,038 
17,441 
17 ,880 
19,433 
20,225 



268 



DELAWARE & HUDSON 
Maintenance. 



Over a series of years the traffic density and maintenance 
charges of the road have compared as follows : 







Maintenance per Mile 




Year 


Traffic Density 






Total 










Way 


Equipment 




1900 


1 ,746 ,742 


$1 ,561 


$1 ,441 


$3 ,002 


1901 


1,928,156 


1,804 


1,655 


3,459 


1902 


1 ,682 ,598 


1,965 


1,805 


3,770 


1903 


2,101,858 


2,052 


1 ,803 


3,855 


1904 


2,114,585 


2,046 


1,868 


3,914 


1905 


2 ,500 ,234 


1,731 


2,235 


3,966 


1906 


2 ,550 ,934 


1,663 


2,391 


4,054 


Average 


2 ,089 ,301 


$1 ,831 


$1 ,885 


$3,716 


Erie 


2,434,819 
2 ,599 ,902 


1,861 
2,156 


3,216 
2,059 


5,077 


N.Y.C. &St.L. 


4,215 


B. &0 


2 ,282 ,704 


1,876 


2,416 


4,292 


Lehigh Valley. 


2 ,771 ,846 


2,588 


3,429 


6,017 



The Delaware & Hudson, being largely a coal road, its 
earnings have been compared with four others of somewhat 
the same character of traffic. It will be seen that, traffic density 
compared, its charges have been well up to the standard of 
of the four other roads shown and the standard of these four 
roads is exceptionally high. A maintenance charge of $4,000 
per mile in 1906 should be amply sufficient to maintain the road at 
a point of high efficiency. 

Improvements from Earnings. 

The company has no special improvement fund, but for 
years large amounts have been charged off from profit and loss 
and devoted to betterment work. In 1905, $800,000 was so de- 
voted to mining plant and $503,642 to equipment. In 1906, 
$1,592,683 was charged off for equipment, $884,910 for new 
railroad construction, $262,662 for unmined coal and $239,918 
for advances for unmined coal. 

Surplus Earnings. 

Before charging off these amounts, the surplus for a series 
of years has shown as follows : 



DELAWARE & HUDSON 



269 



Year 


Surplus 


Per cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Average 
Price 


1900 


$2,958,429 

4 ,370 ,706 
2 ,497 ,874 
6,205,156 

5 ,256 ,446 
5 ,707 ,743 
5,301,622 


8.5 
12.6 

7.2 
18. 
12.8 
13.9 
12.9 


5 

7 
7 
7 
7 
7 
7 


121 


1901 


164 


1902 


173 


1903 


166 


1904 


169 


1905 


201 


1906 


216 







It will be seen that the surplus for 1906 was slightly smaller 
than 1905, this being due largely to a decrease of $741,201 in net 
earnings of the coal department. 

Dividend Record. 

The company passed through a period of difficulties in the 
years prior to 1880, but in 1881 dividends were resumed and 
have since been paid regularly through more than a quarter of a 
century, as follows : 

Year. Dividend. 



1881 . . . 
1882-4 . 
1885... 
1886-7 . 
1888... 
1889-96 
1897-00 
1901-6 . 
1907... 



Ay 2 % 

7 
6 
5 
6 
7 
5 
7 
9 



Coal Operations. 



A very considerable part of the company's business is the 
mining, as well as the carriage, of anthracite coal, and from 
1903 the gross and net earnings (after depreciation charge) of the 
Sales Department have compared as follows: 

Gross. Net. 

1901 $16,924,932 $1,173,938 



1902, 
1903, 
1904. 
1905. 
1906. 



11,064,748 
20,183,231 
19,032,414 
20,214,296 
18,571,342 



728,009 
3,366,073 
1,828,986 
1,790,699 
1,049,498 



270 DELAWARE & HUDSON 

The depreciation charge of 5c. on all coal produced is charged 
against operating expenses and turned into a sinking fund, this 
charge amounting to $238,338 in 1906 and $250,260 in 1905. 

During 1906 the company produced 5,401,389 tons as against 
5,695,493 tons in 1905. 

The net profits of 1906 amounted to 19c. per ton produced 
as against 31c. per ton in 1905. The reduced earnings of 1906 
were due to a slight decrease in jproduct, higher costs and to the 
decreased revenue from coal sales. This decrease shows the 
highly variable profits of this industry. 

The estimated amount of coal owned and controlled January 
1st, 1907, was 207,000,000 tons. If this were figured at an 
average value of 10c. per ton (the company's book valuation is 
about 6c), this would represent an asset of around $20,000,000 
or equivalent to about one-half of the company's outstanding 
capital stock. The average net profits of the company from its 
Sales Department for the six years were equivalent to 8% on 
this sum. 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet showed: 

Current Assets . ... . $6,329,878 

Current Liabilities . . . . . . ...... . . . ..... 4,814,354 



Leaving a working balance of $1,515,524 

The amount of cash on hand was $1,026,799 and the balance 
to credit. of profit and loss was $7,483,281. 

Investment Value. 

For a series of years the surplus earnings shown by the 
D. & H. have averaged above 12^%, while the average dividend 
payments has been under 7%. The market price of the stock 
has steadily risen from an average price of $121 in 1900 to $216 
in 1906. The low price Of 1903-4 was $149, the high price of 
1906 $234, and in May, 1907, it sold as low as $160. 

On the 7% basis of 1906, at the average price of that year, 
the yield to the investor was less than 3j/2%. It is a little diffi- 
cult to understand these high quotations. The Delaware & 
Hudson has been very liberally maintained, but hardly more so 
than other roads like the Erie, the Lehigh Valley, and other 
similar roads. There is little in the published accounts to in- 



Delaware & Hudson m 

dicate that it is actually earning 25% on its stock, as has been 
claimed. So far from that it is not clear that in 1906 any very 
large sums were concealed in operating expenses and the nominal 
surplus shown was probably much nearer the actual earnings of 
the company. 

The proportion which a 9% dividend bears to its nominal 
surplus of 1906 (about 12%) is high, and when it is borne in 
mind that during the coal strike of 1902 the surplus earnings 
were cut nearly in half, the wisdom of the increase in dividend 
is not clear. It is certainly on nothing like so solid a basis as 
was the 7% dividend and even that dividend was threatened by 
the slump in earnings of 1902. 

It is unquestionable that the price of all the coaler stocks 
has been greatly influenced by the spectacular rise in Lacka- 
wanna and in lesser measure by the rise in Reading. But after 
heavy maintenance charges the Lackawanna in 1906 was earn- 
ing 40%, and paying out only half of this in dividends. Reading 
was earning conservatively about 14^% and paying 4%. When 
it is considered how vitally the Delaware & Hudson's earnings 
are dependent upon the prosperity of the coal industry, and tha^ 
this means not merely the prevention of strikes, but the main- 
tenance of prices and the continuance of general prosperity as well, 
it would seem that the stock can hardly be regarded otherwise 
than as a low yield investment with a rather high risk. That 
a reversion from prosperous conditions can easily take place is 
evident enough from the influence of the labor troubles in the 
spring of 1906, as reflected in the report of the road for the 
spring quarter. Three-fourths of the surplus shown in the corres- 
ponding quarter of 1905 was wiped out. 

On a 9% basis there is considerable inducement to exchange 
the $24,000,0000 of outstanding convertibles, and this conversion, 
while reducing the fixed charges, would add over a million dollars 
to the dividend requirements, or an increase of more than 25%. 

With its purchase of the Quebec Southern and the exten- 
sions contemplated, the Delaware & Hudson will add to its 
mileage by about a quarter and very considerably extend its 
range of influence. It seems highly probable, therefore, that 
its general rail earnings will continue to increase, so that rela- 
tively the company will be less dependent upon a single industry 
for its business. But it will be noted that its coal profits have 
shown a steady decrease since the quite unusual figure of 1903, 



272 DELAWARE & HUDSON 

and in view of the Delaware & Hudson's high degree of depend- 
ency upon this single industry, the conservative investor will 
probably conclude that the investment yield on such a stock 
should be considerably higher than that on such standard stocks 
as the Pennsylvania, the New York Central, etc. He will find it 
difficult to understand why, for example, Delaware & Hudson 
should sell at much more than 25% premium above the Penn- 
sylvania. 



DELAWARE, LACKAWANNA AND WESTERN 

RAILROAD. 

The "Lackawanna," as it is familiarly known, is one of the 
great anthracite "coalers," and one of the three largest holders 
of anthracite coal lands. It is one of the wealthiest and best con- 
ducted railroads in America, and is probably the only great road 
in the world which practically earns half its stock capital over 
again each year. Its main line runs from New York City through 
the anthracite coal regions to Buffalo, and considerably over one- 
half of its traffic is anthracite coal. With other coal and coke, 
this comprises about 60% of the road's total traffic. It is 
therefore highly dependent upon the prosperity of the coal 
industry for its own prosperity, and since the award of the 
Anthracite Commission in 1902, its net earnings have increased 
enormously. 

History. 

The road represents the consolidation, in 1853, of two small 
roads, and it was opened throughout in 1856. It has since ac- 
quired under lease the New York, Lackawanna and Western (214 
miles), the Morris and Essex (157 miles), and several other small 
roads. The road was operated mainly as a coal carrier until 
1882, when the line from Binghamton to Buffalo was built, and 
the company entered the field as a competior of the trunk lines 
between New York and the Great Lakes. Its mileage has not 
changed in the last ten years. 

Ownership. 

No single interest controls the road absolutely ; practical 
control is divided between the Vanderbilt family and the Stand- 
ard Oil interests. On its board of managers the Vanderbilt in- 
terests are represented by Frederick W. Vanderbilt and H. McK. 
Twombly ; the Standard Oil interests by William Rockefeller, 
John D. Rockefeller Jr., and James Stillman, president of the 
National City Bank. The First National Bank is represented by 
George F. Baker, president, Harris C. Fahnestock, vice-president, 
and Wm.H. Moore, financial head of the Rock Island system. 

18 (273) 



274 DELAWARE, LACKAWANNA & WESTERN 

Closely associated with the Standard Oil interests is Samuel 
Sloan, chairman of the Executive Committee, and long the presi- 
dent of the road, and now the vice-president of the National City 
Bank. The other directors are, Moses Taylor Pyne and H. A. C. 
Taylor, representing the Moses Taylor estate; J. Rogers Max- 
well, chairman of the Executive Committee of the Central Rail- 
road of New Jersey; Eugene Higgins, and Frank Work. The 
Executive Committee comprises Samuel Sloan, H. McK. 
Twombly, William Rockefeller, G. F. Baker, M. T. Pyne, and 
William H. Truesdale, president. 

Affiliations. 

The Lackawanna, though not one of the larger railroads of 
the country, is exceptionally independent, and has comparatively 
slight direct affiliations with any other road. It is not extensively 
interested in other roads, and its holdings, outside of the stocks 
and bonds of underlying companies, are not large. It does not 
figure especially as a member of the New York Central-Penn- 
sylvania "Community of Interest" organization, though through 
the Vanderbilt and Standard Oil holdings, it is very closely 
associated with the New York Central, and is practically under 
the same ownership. 

Capitalization. 

As of Jan. 1, 1907, the capital account stood as follows : 

Stock $26,200,000 

Funded Debt 3,067,000 

Stocks & Bonds of leased lines 91,172,410 



Total capital $120,439,410 



Securities held 18,191,813 



Approx. net capitalization $102,247,597 



Approx. net capit. per mile $132,789 

Average miles operated 770 

Net earnings on net capital 13.7% 

Stock on net capitalization 25% 

Fixed charges on Total Net Income 38% 

Factor of Safety 62% 



DELAWARE, LACKAWANNA & WESTERN 275 

It will be seen that the nominal capital is small as compared 
with the total valuation of the operated mileage, and the amount 
paid in rentals on the underlying railroads is comparatively very 
high. 

Of the $18,000,000 of securities held, those of underlying 
leased roads amounted to $6,363,350 par value. From the latter 
it derives 4% interest and from its total holdings the same. 

The Lackawanna has no large equities in other roads. 

The net earnings represent 13.7% on the estimated net 
capitalization, as against 8.1% for the Pennsylvania, and 5.8% for 
the New York Central. As compared with these two roads, 
therefore, the estimated capitalization is low. 

Coal Lands. 

After the Reading, the Lackawanna is one of the largest 
owners of anthracite coal lands in America. The government 
estimates of 1904 placed the amount of unmined coal on its 
lands at 400,000,000 tons, which compares with a similar estimate 
for the Lehigh Valley Railroad holdings, and of $2,450,000,000 
tons for the Reading. These are the highest three. 

In 1906, the coal operations of the company, including its 
own production and that purchased from individual operators, 
aggregated 9,172,743 tons, a very slight decrease from the year 
before. The total sales for the year aggregated $36,542,736, or 
an average of $3.99 per ton, almost identically the same figure 
as for 1905. 

Net profits from coal operations were $3,655,119, or, including 
$609,021 expended for improvements, $4,264,140. Taking the 
latter figure, this was an average of 46c. per ton net profit, 
which was a slight decrease from the proceding year. 

If, as has been done in the estimates of other anthracite 
coal holdings, the Lackawanna's unmined coal were taken at no 
more than 10c. per ton, its valuation would still be around 
$40,000,000. It may be assumed that the actual value of these 
holdings is considerably above this minimum estimate. If 
the net profits for 1905-6, after charging off very considerable 
sums for improvements, were averaged and capitalized on no 
more than a 6% basis, this would give a valuation to the com- 
pany's coal property of around $50,000,000. It is probably 
actually not much less than this and quite possibly considerably 
more. 



276 DELAWARE, LACKAWANNA & WESTERN 

This is, of course, considering the coal property quite apart from 
its position as a tributary to the earnings of the road. Actually, 
for 1906, and for several years preceding, the transport of coal 
contributed one-half of the entire freight traffic of the road and 
the earnings per ton were very considerably higher than on 
merchandise traffic. The average ton mile rate on the coal 
traffic was .87c. as against an average merchandise rate of .69c. 
and the rail earnings per ton of coal transported were $1.50 
per ton as against $1.08 per merchandise ton. 

These coal rates were undoubtedly high, though they have 
not increased from the general bed-rock year of 1899. But the 
average ton mile rate compares with an average rate on all 
traffic on the Norfolk & Western, for example, of only .48c. per 
ton and a somewhat similar rate on the Chesapeake & Ohio and 
the Baltimore & Ohio. Such figures could be obtained only from 
what amounts practically to an absolute monopoly of the anthra- 
cite coal business, and it is this fact which gives an element of 
instability to the earnings of the Lackawanna and other anthra- 
cite coalers. 

Style of Capitalization. 

The amount of bonds issued directly by the Lackawanna, 
$3,067,000, stands against $26,200,000 of common stock. The 
common stock represents only 25% of the estimated net capitali- 
zation, as against 33% for the New York Central, and 53% for 
the Pennsylvania. This would ordinarily be very low, but the 
earnings of the road are extraordinarily high. Thus Fixed 
Charges represented only 38% of the total net income, which ac- 
cording to the method here employed, represents a Factor of 
Safety of 62% for the underlying securities. That is to say, the 
net income of the road could decline by three-fifths before the 
interest and rental paying power of the road was impaired. This 
compares with a Factor of Safety of only about 36% on the 
New York Central, and with 62% on the Pennsylvania. 

The approximate Net Capitalization per mile of road opera- 
ted is high; its $132,789 compares with an estimate of $145,566 
for the Pennsylvania, of $123,188 for the New York Central. If 
the rentals paid by the Lackawanna had been capitalized at 
4%, as has been done in the case of the other two roads, instead 
of taking the actual amount of the stocks and bonds of the 
leased roads, as was possible from the Lackawanna reports, but 



DELAWARE, LACKAWANNA & WESTERN 277 



not for the other roads, this estimate would be raised considerably. 
But on the other hand no account is taken of the value of the 
Lackawanna's coal holdings, which might reduce the estimated 
net capitalization by perhaps 50%. 

Increase of Capitalization. 

The nominal capital of the road has not changed in the six 
years, while its gross earnings have increased more than 50% 
as follows : 



Year 


Common 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1900 


$26 ,200 ,000 
26 ,200 ,000 


$3 ,067 ,000 
3 ,067 ,000 


$29,267,000 
29,267,000 


$20 ,887 ,763 


1906 


32,962,880 



Net increase over six years : Nominal Capital, nil ; Gross 
Earnings, 56%. 

Character of Traffic. 

As already noted, some 60% of the Lackawanna's traffic is 
represented by the coal business of the road. The following 
tables, prepared by the Wall Street Journal, show Lackawanna's 
percentage of gains in earnings from its three principal sources : 





Gross earn. 


Gross earn. 


Gross earn. 


Year. 


from coal. 


gen. mdse. 


passenger. 


1905... 


$13,993,585 


$9,230,787 


$5,529,002 


1904... 


13,230,870 


8,337,823 


5,215,919 


1903... 


13,826,844 


8,354,908 


5,083,142 


1902... 


8,145,920 


7,013,424 


4,592,036 


1901 . . . 


10,709,344 


6,668,689 


4,522,383 


1900. . . 


8,535,324 


6,660,186 


4,186,232 


1899... 


9,407,796 


6,300,149 


3,951,051 


Increase six yrs. 


$4,585,789 


$2,930,638 


$1,577,951 


Per cent, increase 


48% 


46% 


39% 



That rates have in the period referred to affected the ques- 
tion of increased earnings but little, one way or the other, is evident 
from the following : 



278 DELAWARE, LACKAWANNA & WESTERN 



Rate per ton mile (cents) : 
Year. 

1905 

1904 

1903 

1902 

1901 

1900 

1899 



Coal. 


Mdse. 


Pass. 


0.87 


0.68 


1.42 


0.86 


0.70 


1.41 


0.86 


0.70 


1.43 


1.11 


0.70 


1.45 


0.89 


0.68 


1.41 


0.92 


0.69 


1.48 


0.94 


0.67 


1.51 


0.07 


0.01 


*0.09 


7y 2 % 


\y 2 % 


*6% 



Inc. in 6 years 0.07 

Inc. per cent 

*Decrease. 

The tonnage of merchandise has increased about equally 
with that of coal, but it is the ton mileage figures on coal that 
show a large gain, offering some explanation of the larger gain 
in coal traffic receipts. The passenger traffic has shown a gain of 
nearly 50%. 

Stability of Earnings. 

Despite the fact that the road is so closely dependent on a 
single industry, its traffic earnings have been remarkably steady, 
though since the settlement of the coal strike by the Commis- 
sion of 1902 they have shown a very heavy increase, as will be 
seen from the following table ; they averaged around $22,000,000 
per year from 1896 to 1903, and then jumped by almost half. 



Year 



1896. 
1897. 
1898. 
1899. 
1900. 
1901. 
1902. 
1903. 
1904. 
1905. 
1906. 



Miles 
Operated 



771 
771 
771 
771 
771 
771 
771 
770 
770 
770 
770 



Gross 
Earnings 



$21 ,403 ,506 
21,002,017 
22,168,344 
21,325,122 
20 ,887 ,763 
23 ,507 ,634 
21 ,398 ,764 
29,180,964 
28,701,991 
31 ,951 ,063 
32 ,962 ,880 



Gross 
Earnings 
Per Mile 



$27 ,756 
27 ,239 
28 ,752 
27 ,659 
27 ,091 
30 ,481 
27 ,754 
37 ,897 
37 ,275 
41 ,496 
42 ,888 



It will be seen that the company's earnings are largely de- 
pendent upon the maintenance of the present amicable conditions, 
and the prosperity of the road therefore hangs very closely upon 



DELAWARE, LACKAWANNA & WESTERN 279 

the ability of the management to maintain the present satisfac- 
tory arrangements with its operatives. A coal strike would affect 
its earnings profoundly. 

Maintenance. 

The traffic density of the road is very high, amounting for 
1906 to 3,868,000 ton miles per mile of road operated. The aver- 
age for seven years was 3,163,000 as compared with 4,130,000 for 
the Pennsylvania. 

Maintenance charges with the Lackawanna have for years 
been very large, as the table below will show. For 1906 they 
amounted to $10,190 per mile of road operated, a figure which is 
surpassed only by the Pennsylvania. For a series of years the 
figures were as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


per 
Mile 


1900 
1901 
1902 
1903 
1904 
1905 
1906 


2 ,445 ,032 
2,832,759 

2 ,247 ,883 

3 ,598 ,454 
3 ,526 ,933 
3,826,713 
3 ,868 ,820 


$3 ,996 

4,288 
4,388 
4,738 
5,085 
6,034 
6,412 


$3 ,601 
3,183 
3,518 
3,627 
3,815 
3,734 
3,778 


$7 ,597 
7,471 
7,906 
8,365 
8,900 
9,768 

10,190 


Average 


3,163,799 


$4,991 


$3 ,608 


$8,599 


Erie 


2 ,588 ,317 
4,130,690 
3,420,895 


1,245 
3,752 
3,033 


2,890 
5,232 
5,181 


4,733 


Penn 


8 ,984 f 
8,215 i 


Reading 



Extra track, 480 miles. 

Improvements from Earnings. 

The policy of setting aside large sums for betterments and 
renewals has been pursued for a series of years, as follows : 

1901 $2,523,127 

1902 3,058,148 

1903. 4,319,166 

1904 3,446,719 

1905 3,587,485 

1906 5,551,618 



Total for six years $22,486,263 

This is equivalent to 86% on the capital stock, 



280 DELAWARE, LACKAWANNA & WESTERN 

In addition to this, the following extraordinary expenditures 
are reported by the road as included in operating expenses : 

1901 $1,228,954 

1902 1,632,737 

1903 1,478,106 

1904 1,715,523 

1905 2,281,881 

1906 2,174,936 



Total for six years $10,512,137 

The combined sums included in these two tables ($32,998,- 
400) were equivalent to $42,855 per mile, or rather more than 
the entire actual cost of many western roads. In other words, 
in six years, the working part of the road has been practically 
reconstructed. In six years 71,747 tons of 80-lb. steel rails have 
been laid on 957 miles of single track operated ; equipment has' 
been increased by 346 modern locomotives, 6,000 box cars and 
5,000 coal cars ; while millions of dollars have been spent for new 
terminals, steel bridges, straightening out tracks and reducing 
grades. 

Surplus Earnings. 

The earnings of the Lackawanna on its capital stock have 
of late years become simply enormous. For 1906 they were 
$5,827,071, after charging off $5,551,618 for renewals and better- 
ments. Had the latter been included, the surplus would have 
represented 43% on the capital stock of the road, and this was 
after high maintenance charges. Deducting betterments, the 
remaining surplus still represented 22.4% on the stock. For a 
series of years, the items compare as follows : 



Year 


Surplus 


Per cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Average 
Price 


1900 


$2 ,560 ,381 
5,553,183 
2,711,496 
10 ,404 ,404 
10 ,220 ,590 
11,525,913 
11,378,689 


% 

9.5 
20.8 
10.1 
39. 
38.4 
43.9 
43.4 


1* 

7 

7 

7 

7 
7 (10 ext.) 
9i 
10 


223 


1901 


222 


1902 


273 


1903 


249 


1904 


282 


1905 


409 


1906 


504 







DELAWARE, LACKAWANNA & WESTERN 281 

Dividend Record. 

The Lackawanna formerly paid 10% on its capital stock, but 
in the dull years of 1876-80, the dividends were passed. In the 
latter year, 3% was paid; in 1881, 6^%; in 1882-4, 8%; early in 
1885, 7^% ; and since then 7% yearly, up to 1904. In 1904 an 
extra dividend of 10% was declared, making 17% in all; in 1905 
the road was placed on a regular 10% basis, which with 10% 
extra, made 20% for the year. The same was paid in 1906. 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet, excluding 
materials and advances to leased roads, showed : 

Current Assets $9,859,449 

Current Liabilities 7,825,581 

Leaving Balance of $2,033,868 

The amount of cash on hand was $2,324,314 and the surplus 
to credit of profit and loss was $24,395,584. 

From this it would appear that the company was not overly 
provided with ready capital, but included in the liabilities was 
$1,534,184 of rentals not yet due, and in addition to this, the 
company had advanced to leased and controlled roads, $2,118,385. 

Investment Value. 

The Lackawanna stock sold on May 24th, 1906, at $560 per 
share, about the highest price ever known for any road of con- 
siderable extent in this country. This represented a rise from 
$230 in 1903, and from $171 in 1900. The highest price paid in 
1902 was $297. The average for 1906 was around $500 per share. 

On a 20% basis this represents a yield to the investor of 
only 4%, with time money ruling at 5% or over. On its face this 
represents a seemingly high valuation for the stock ; on the other 
hand, the amount paid in dividends in 1906 represented only 46% 
of the actual earnings on the stock, even after a more liberal 
policy as to betterments and improvements than is pursued in 
the generality of roads. The company states that in its operating 
expenses for 1906, $2,174,936 of extraordinary expenditures was 
included, and this with the $5,551,618 set aside for renewals and 
betterments, represents a sum largely in excess of the dividend 
payments. 

Disregarding the extraordinary expenditures included in 
operating expenses, the 20% dividend was still less than half of 



282 DELAWARE, LACKAWANNA & WESTERN 

the actual surplus earned. That is to say, the surplus could be 
decreased by half before the present dividend payments would be 
imperiled. Virtually, therefore, over and above the 20% divi- 
dend, the stock represents an equity on the basis of 1906 earn- 
ings, of rather more than an additional 20%. It is this which 
accounts for the high selling price of the stock. 

The first six months of 1906 showed a very considerable de- 
cline, due to the coal difficulties in the Spring of the year. Gross 
earnings for the spring quarter of 1906 showed a decline of 
about 18%, cutting down the available surplus for the quarter 
by 60%. Though this was fully made up later in the year, it 
will be seen how vitally sensitive Lackawanna is to the mainte- 
nance of its coal operations. A similar decline for the whole 
year would have wiped out the larger part of the nominal sur- 
plus, and certainly necessitated a heavy cut in the dividend, and 
supposing expenses to have declined proportionately', would 
probably have put the road back on a 7% basis. 

Despite its enormous earnings, therefore, Lackawanna is a 
highly speculative investment, and a Factor of Safety of some- 
thing like 100% on its present dividend is none too small. Set- 
ting aside for renewals and betterments an amount equivalent 
to about 20% on its capital stock, is no more than careful, con- 
servative management, and a further very heavy increase in 
the Lackawanna's dividend would probably be regarded a 
distinct departure from its excellent traditions. An unbroken 
continuance of the flush times of the last three years can scarce 
be expected, so that, putting back so heavy a proportion of earn- 
ings into the road is simply intelligent anticipation of the in- 
evitable rainy day. 

From the foregoing the investor should be able to make up 
his own mind as to the value of the stock. It seems improbable 
that at $400 a share the stock would actually yield more than 
4% on the investment through a series of years. On the other 
hand, the maintenance of this dividend rate, barring strikes, 
seems not improbable. At $400 per share, it would be to most 
investors in stocks an attractive purchase. Above this figure it 
is a pure gamble on the continuance of prosperity and the pre- 
vention of strikes. The stock is closely held and very little of 
it is thrown upon the market, even in pressing times. This fact 
makes it very easy to run the price of the stock up to a high 
figure on comparatively small sales. 



DENVER AND RIO GRANDE RAILROAD. 

The westernmost portion of the Gould system of railways 
is at present the Denver and Rio Grande, which carries the Gould 
lines from the western end of the Missouri Pacific at Pueblo, in 
Colorado, through an extensive network of lines to Denver on 
the north, and to Salt Lake and Ogden on the west. The system 
embraces the Denver and Rio Grande proper, with a main track 
from Denver to Grand Junction, the Rio Grande Western 
from Grand Junction to Salt Lake and Ogden, and the Rio 
Grande Southern Railroad, operating in western Colorado. The 
latter road, is, however, under separate management. 

The Rio Grande penetrates the rich mineral districts of the 
Rockies and extensive coal fields as well. It is likewise famous 
as a scenic line and enjoys a large tourist traffic on this account. 

With the completion of the Western Pacific, which is being 
financed through the Denver and Rio Grande, the latter will be- 
come an important link in a transcontinental line. At the pres- 
ent time it is on its western connections completely dependent 
upon the Union Pacific system, now hostile to it, by reason of the 
Western Pacific undertaking. 

History. 

The Denver and Rio Grande has had a tumultuous history. 
Organized in 1870, its earlier years were mainly a series of fights, 
sometimes in the courts, but more often in the canyons, for 
feasible rights of way through the mountainous territory which 
it occupies. Originally designed to extend from Denver to El 
Paso, the project was stopped and turned westward rather than 
southward through a treaty of peace with the Atchison. 

For a considerable time the Denver and Rio Grande enjoyed 
more or less of a monopoly of its territory, but this was broken 
through the building of the Colorado Midland by the Atchison. 

(283) 



284 DENVER & RIO GRANDE 

Increasing competition, too rapid extension, together with rank 
dishonesty in the old management combined to throw the road 
into the hands of a receiver in 1886. It was then reorganized as 
the Denver and Rio Grande Railroad, and the Fixed Charges 
were so reduced as to enable the company to weather the bad 
years of 1893-7 without a second receivership. Meanwhile the 
troubles of the Atchison threw the Colorado Midland into a re- 
ceiver's hands and with the ensuing reorganization, the latter 
road passed to the joint control of the Colorado Southern, now 
a part of the Hawley lines, and the Rio Grande Western, in 
turn controlled by the Denver and Rio Grande. 

Originally a narrow gauge road, the larger part of the 
system has been changed to standard gauge, so that the mileage 
now stands as follows : 

Standard Gauge 1,619 miles. 

Narrow Gauge 913 

Total 2,532 " 

Double track 62 

Ownership. 

After having been operated for a number of years as an 
independent line, the Denver passed to the Gould interests in 
1901. In that year the Missouri Pacific acquired $7,300,000 of the 
preferred and $14,800,000 of the common stock. It is understood 
that the Rockefeller holdings in the road are extensive, and that 
these, with the Gould and Missouri Pacific's, are sufficient to 
ensure control. But the Rockefellers are not openly represented 
in the directorate of the Denver, nor in the Colorado Fuel and 
Iron Company, an industrial corporation closely associated with 
the Denver and Rio Grande Railroad. 

The board of directors consists of George J. Gould, chair- 
man, also president of the Missouri Pacific; Edwin Gould, 
Howard Gould, E. T. JefTery, president, and A. H. Calef, asso 
ciated in various Gould enterprises ; Winslow S. Pierce, counsel, 
also director in the Wabash and other Gould roads; Arthur 
Coppell, of Maitland, Coppell & Co., bankers, New York ; Charles 
H. Schlacks, vice-president, and Joel F. Vaile, general counsel, 



DENVER & RIO GRANDE 285 

Denver Colo. The affiliations are now exclusively with the other 
Gould lines. 

Up to 1905, Mr. Harriman was represented on the board of 
the Denver, and Mr. Gould in his turn was represented in the 
Union Pacific. These relationships were broken off in 1905 when 
the construction of the Western Pacific was begun. 

Capitalization. 
The capitalization of the road on June 30th, 1906, stood as 
follows : 

Common stock , $38,000,000 

Preferred stock 45,712,700 

Total $83,712,700 

Funded debt : . . 78,221,100 

Nominal capital $161,933,800 

Rentals cap. at 4% 5,050,000 

Approximate Gross capitalization $166,983,800 

Securities held 35,727,400 

Approx. net capitalization $131,256,400 

Approx. net capital, per mile $52,990 

Miles operated 2,477 

Net earnings on net capital 5.7% 

Stock on net capital 63% 

Fixed Charges on total net income. . . . 52% 

Factor of Safety 48% 

For a road with gross earnings of $7,500 per mile, the 
Denver is rather heavily capitalized, but this is generally true of 
the Pacific roads. Its capitalization of $52,990 per operated mile 
stands against $58,887 for the Atchison and a somewhat similar 
figure for Union Pacific. Net earnings on the estimated capital 
show only 5.7%, which for a western road means a relatively 
high capitalization, though the stock represents 63% of the esti- 
mated net capitalization, and the Fixed Charges consume only 
52% of the Total Net Income. The style of capitalization there- 
fore, is well adapted to ward off another visit of the sheriff. 
Moreover no dividends have ever been paid upon the $38,000,000 
of common stock, this latter representing merely a possible ab- 
sorbent of future surplus. 



286 



DENVER & RIO GRANDE 
Equities Owned. 



The Denver holds in its treasury the entire stock of the Rio 
Grande Western Railroad. The two roads are operated together, 
and the bonds of the latter are included in the statement of the 
funded debt of the Denver. The Denver owns $3,158,237 stock of 
the Rio Grande Southern, comprising a majority, and it guarantees 
$2,277,000 bonds of the latter railway. Other minor securities 
bring up the total as carried upon the books to $25,624,486. Fur- 
ther securities of a book value of $9,768,063 are deposited with 
the Morton Trust Company, in which the chief item is $10,- 
000,000 stock of the Utah Fuel Company. These securities are 
deposited as collateral for certain first consolidated mortgage 
bonds of the Rio Grande Western Railroad. 

Deducting from the book value of the securities owned, the 
item of $20,750,000, cost of the stock of the Rio Grande Western, 
whose earnings are included as part of the Denver's earnings, 
we have a net of $17,000,000 from which the company derived 
for the year of 1906 an income of $167,800, or less than one 
per cent. 

With the completion of the Western Pacific, the Denver & 
Rio Grande will have in its treasury $50,000,000 of stock repre- 
senting no money outlay other than such as may be necessary 
to make good the guarantees which are given in payment of the 
stock. 

Increase of Capitalization. 

It will be seen from the following table that in the six years 
from 1900 the capitalization increased iby half, while the gross earn- 
ings nearly doubled. 



Year 


Common 
Stock 


Preferred 
Stock 5% 


Funded 
Debt 


Total 


Gross 
Earnings 


1899-0. . . 
1905-6. . . 


$38,000,000 
38,000,000 


$23,650,000 
45,712,700 


$43,219,500 
78,221,100 


$104,869,500 
161,933,800 


$10,246,759 
19,686,114 



Net incrase over six years: Nominal capital, 55%; Gross 
earnings, 92%. 



DENVER & RIO GRANDE 
Character of Traffic. 



287 



The following shows the percentage of tonnage and revenue 
from various classes of freight for the year ending June 30th, 1906 : 



Agriculture . 
Animals .... 

Mines 

Lumber .... 
Manufactures 
Miscellaneous 



Tonnage %. 


Revenue % 


6.86 


8.41 


5.68 


5.85 


5.21 


52.71 


4.46 


4.53 


12.31 


10.44 


17.57 


18.06 



The largest single item was coal and coke, which made up 
28% of the total tonnage. Precious ores stood next, with 16%. 
The traffic is therefore highly varied and not dependent on any 
single industry. 

Stability of Earnings. 

The Denver's mileage has increased very slightly in ten 
years, while the gross earnings have doubled. 



Year 


Miles Operated g| 


Gross Earnings 


Per Mile 


1896-7 


2,212 
2,232 
2,254 
2,294 
2,330 
2,347 
2,378 
2,398 
2,420 
2,477 


$9,413,618 
11,705,213 
12,623,235 
14,756 683 
16,359,610 
17,036,828 
17,304,560 
16,446,435 
17,031,507 
19,686,114 


$4,256 


1897-8 


5,244 


1898-9 


5,600 


1899-0 


6,433 


1900-1 


7,021 


1901-2 


7,259 


1902-3 


7,277 


1903-4 


6,859 


1904-5 


7,038 


1905-6 


7,498 





The earnings per mile increased from $4,256, in 1896, to 
$7,500 in 1906. This is an excellent showing, and inasmuch as 
the increase has been steady, there seems to be no reason to sup- 
pose that with the development of Colorado's resources this im- 
provement should not continue. From the augmented through 
traffic which should come with the completion of the Western 
Pacific, the Denver should draw still further profits. 

Maintenance. 

The following shows the mileage appropriations for mainte- 
nance through a series of years : 



288 



DENVER & RIO GRANDE 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


Not reported 
425,185 
416,424 
355,835 
368,653 
435,344 


$ 928 
1,046 
964 
907 
825 
975 


$652 
732 
817 
800 
839 

1,036 


$1,580 
1,778 
1,781 
1,707 
1,664 
2,011 


Average. . . . 


400,288 


$940 


$812 


$1,752 



Extra main track, 62 miles. 



Atch 

Union Pac. 



577,005 
739,206 



1,123 
1,173 



1,113 
1,049 



2,236 
2,222 



These figures do not look overly liberal, but it should be 
recalled that one-third of the total mileage is narrow gauge, 
which can be maintained much more cheaply than the standard 
gauge. Furthermore, the company has very little extra main 
track. The maintenance of equipment was equivalent to $2,276 
per locomotive, $606 per passenger car, and $56 per freight car. 

Of the locomotives in use, 142 out of 486 are narrow gauge ; 
one-third of the passenger cars, and one-fourth of the freight 
cars. In view of this the maintenance was probably sufficient, 
without, however, concealing large amounts of profits. 

Improvements. 

Since 1901 the sum of $120,000 annually has been set aside from 
the earnings as a renewal fund, and from the surplus earnings the 
following amounts have been devoted to betterments and new equip- 
ment : 

1902-3 $417,517 

1904-5 283,915 

1905-6 1,150,000 

Total $1,851,432 

These amounts against annual maintenance charges of four 
or five million dollars are not very high. 

Surplus Earnings. 

The surplus shown over charges for six years was as follows : 



DENVER & RIO GRANDE 



289 



Year 


Surplus 


Dividends 

Paid on 

Preferred 


Per cent. 

Earned on 

Common 


Average 

Price 

Pref. Com. 


1900-1 


$2,053,422 
3,202,625 
2,962,561 
2,574,413 
2,932,452 
3,712,473 


5 
5 
5 
5 
5 
5 


2.3 

2.6 

2. 

0.7 

1.7 

3.3 


91 
92 
76 

77 
87 
88 


41 


1901-2 


44 


1902-3 


30 


1903-4 


27 


1904-5 


33 


1905-6 


44 







It will be seen that nominally the company has for some 
years earned a small percentage on its common stock. 

Dividend Record. 

The dividend record since 1887 is as follows : 



Year. 

1887... 

1888... 

1890... 

1891... 

1893... 

1896-7 . 

1898... 

1899-00 

1901-6 . 



Preferred 

2/ and 1% scrip. 

2 
2 

2/2 

4 
5 



Common. 



It was fifteen years after the reorganization of the company 
before it was able to pay the full five per cent, on its preferred 
stock, but this has been paid regularly for the last six years. On 
the basis of the exceptionally prosperous year of 1905-6, the 
margin of safety, if we exclude special appropriations for better- 
ment, was 18%, but this surplus was something beyond anything 
that had before been shown by the road. On a five years basis 
the margin of safety as to the preferred would be less than 10% 
on the total net income. 

Present Conditions. 

The general balance sheet as of June 30, 1906, showed as 
follows : 

Current assets $9,767,419 

Current liabilities 5,610,430 



Leaving a working balance of $4,156,989 



19 



290 DENVER & RIO GRANDE 

The credit to profit and loss, including renewal fund, was 
$3,642,930. 

Investment Value. 

The future of the Denver and Rio Grande is bound up on 
the one hand in the prosperity of Colorado and Utah ; on the 
other hand, the success of the Western Pacific. 

The resources of Colorado have been considerably aug- 
mented by introduction of scientific methods of farming, both 
through irrigation and through banking the top soil. The state 
has thoroughly recovered, from the depression due to the decline 
of the silver industry. It has rich coal fields which are developing 
rapidly, and from its varied resources it is probably in as good 
a position to stand some recession from recent prosperity as any 
state in the Union. Should the rise in the price of silver con- 
tinue, this would mean a revival in silver mining, which would 
still further contribute to its solidity. 

The state of Utah is settled by a remarkably frugal and indus- 
trious people who farm by means of irrigation, which forms as 
solid a basis for agriculture as can be conceived. The mineral 
resources of Utah are immense, and show a steady development. 

On the side of local traffic, therefore, there seems every rea- 
son to believe that within the next ten years the traffic of the 
Denver and Rio Grande should continue to show a steady in- 
crease, perhaps not equal to that of the last ten years, but cer- 
tainly sufficient to predict a prosperous future for the road. 

The construction of the Western Pacific was virtually forced 
by the change in ownership of the Central Pacific line; that is 
to say, the Southern Pacific Railroad. When the latter came 
under the control of the Union Pacific it was easy to see by the 
aggressive policy of the Union Pacific's management, that the 
Denver and Rio Grande would be in a less favorable position as 
regards through traffic than formerly. 

By undertaking a contingent liability, the Denver and Rio 
Grande and the Rio Grande Western together receive two- 
thirds of the capital stock of the new Pacific line, and if the latter 
turns out to be as feasible a project as it now seems, this should, 
in the course of time, become a source of considerable revenue, 
both directly and indirectly to the Denver road. 

In view of all this, should the excellent management of the 
Denver continue, its stock would seem to present as favorable 
an investment, for a long pull, as perhaps any on the market. 



DENVER & RIO GRANDE 291 

The preferred stock of the Denver is limited to five per cent, 
and is non-cumulative. Unless a very drastic setback should 
come, the full dividends on this stock seem fairly well assured, 
though a glance at the table of surplus earnings will show that it 
is not without risk. The prices at which it has ruled obviously 
take this risk into consideration. A solid 5% stock, with 4%, 
money, should sell between par and 125. Denver preferred, in 
the last four years, has ruled between 62 and 103. It sold up to 
the latter figure in the very prosperous year of 1901-2, and it 
sold off to 62 in the general slump of 1904, rising again to 91 in 
1905. In the general decline of 1907 it sold down to 70. At 
anything like the latter figure it would seem to present an at- 
tractive purchase, though it is obvious that it might sell lower. 
Very many investors do not like to touch a stock where new 
construction is under prospect, and the building of the Western 
Pacific is to all intents and purposes a new division of the Den- 
ver and Rio Grande. 

The price of the common stock has fluctuated very widely. 
It was run up to 53 in 1901, and to 52 in 1902. It slumped to 18 in 
the general decline of 1903-4, rising again to 51 in 1906. It sold 
below 25 in the general decline of 1907. At somewhere around 
the low point of 1907, that is, somewhere below 25, it would 
certainly seem to offer inducements to the investor who 
would put his stock by and hold it for a number of years. Bought 
at something like these low prices, it could probably be sold at 
a handsome profit when it rose again, to be repurchased lower 
down if the high prices did not hold. By watching the earnings 
of the road, the investor would be able to determine whether a 
very considerable rise in the price was justified, and again 
whether the stock seemed worth purchasing at lower levels. 

A brief discussion of the Western Pacific project will be 
found under that heading. 



DETROIT, TOLEDO AND IRONTON— ANN 
ARBOR SYSTEM. 

This new system was formed by the purchase in June of 1905 
by the Detroit, Toledo and Ironton, of about three-quarters of the 
stock in the Ann Arbor Railroad, placing the two roads under a 
single management. The D. T. I. is a reorganization of the De- 
troit Southern and operates a line from Detroit, via Lima, O., 
to Ironton on the Ohio River, and its main business is the haul- 
age of soft coal. The Ann Arbor extends from Toledo north- 
westerly to Frankfort on Lake Michigan, with a line of ferries to 
various points in northern Wisconsin and northern Michigan. 

The combined roads have a total mileage of 727 miles, and 
showed gross earnings in 1906 of $4,090,208, or an average of 
$5,488 per mile. 

The Detroit Southern passed into a receiver's hands in 
1904, and was reorganized in May of 1905. In June of 1905 it 
issued $5,500,000 of collateral trust notes in purchase of $3,- 
010,000 par value out of a total of $4,000,000 preferred stock of 
the Ann Arbor, and $2,190,000 par value out of a total of $3,250,000 
of Ann Arbor common. The Ann Arbor had up to that time 
been dominated by Gould interests and its president — Joseph 
Ramsay — was also president of the Wabash. 

Ann Arbor preferred, in the first half of 1905, sold in the 
market at from $66 to $79 per share, and the common at from $34 
to $37 per share. Taking the higher figures in each case, this 
would give a total valuation for the purchase of the D. T. I. of 
about $3,000,000, which stands against $5,099,000, the valuation 
at which this stock is carried on the books of the Ironton road. 
This, apparently, represented a very comfortable price, or mar- 
gin of profit, for some one. 

The D. T. I. is building a bridge across the Ohio River at 
Ironton, and it was announced that the same interests in control 
of the Ironton are building an independent line from Ashland, Ky., 
to Pound Gap in the same state, a distance of 125 miles, affording 

(292) 



DETROIT, TOLEDO & IRONTON 293 

connection with 350,000 acres of coal lands owned by these par- 
ties. This would give the owners of the latter a very direct route 
from their Kentucky coalfields to Lake Erie, and the construction 
of this line would very materially enhance the traffic of the 
Ironton road. 

Ownership. 

The interests in control of the new system are much the 
same as those who had control of the Cincinnati, Hamilton 
and Dayton, and who engineered the merger of the latter, the 
Pere Marquette and the Chicago, Cincinnati and Louisville, 
shortly before the first two of these roads passed into the re- 
ceiver's hands. The directorate includes Eugene Zimmerman, 
president of the Cincinnati, Hamilton and Dayton up to the sale 
of the control of that road to the Morgan interests in 1905 ; 
George M. Cumming, president of the United States Mortgage 
and Trust Company and chairman of the board of directors of the 
Wisconsin Central under its new regime, formerly a director in 
the C. H. & D. ; Joseph S. Auerbach, director in various banking 
companies in New York; F. J. Lisman, of F. J. Lisman & Com- 
pany, bankers, New York, and vice-president of the defunct De- 
troit Southern; T. D. Rhodes, New York; J. H. Scoville, a 
director in the Interborough of New York City; Benjamin S. 
Warren, Detroit; Bernard J. Burke, vice-president, New York; 
Frank A. Durban, second vice-president, Zanesville, Ohio. 

The Ann Arbor board includes Messrs. Zimmerman, Cum- 
ming, Burke, Durban, Scoville and Warren of the D. T. I. board ; 
Rudolph Kleybolte, formerly director in the Cincinnati, Hamil- 
ton and Dayton under the Zimmerman management; H. B. Hol- 
lins, Jr., J. E. Watson, and James E. Tolfree, New York ; and M. 
L. Sternberger, Wallston, Ohio. 

Capitalization. 

In 1906, including two months of the operation of the re- 
organized company, and ten months of the old Detroit Southern 
in the hands of the receivers, the D. T. I. on gross earnings of 
$1,468,000, showed net earnings of $153,695. This was insuf- 
ficient by $286,000 to meet the interest payment on the road. 
This road, earning only $3,367 per mile, and showing a deficit, 
was provided with a modest capitalization of $25,000,000 of stock, 
not new capital but simply stock issuable for old securities. In 



294 DETROIT, TOLEDO & IRONTON 

the purchase of the Ann Arbor it issued $5,500,000 of collateral 
trust notes already noted and pledged further as security on 
these notes, $5,000,000 of its collateral trust bonds. These issues, 
with some $2,000,000 of equipment trust notes, brought the total 
indebtedness of the road to $24,926,465, at the close of the fiscal 
year of 1906. 

Adding in the bonds, and the outstanding stock of the Ann 
Arbor not held by the D. T. I., the capital account of the system 
on June 30th, 1906, stood as follows : 

Common stock $12,500,000 

Preferred stock, 1st 7,500,000 

Preferred stock, 2d 5,000,000 

Total stock $25,000,000 

Funded debt D. T. 1 24,926,465 

Ann Arbor bonds 7,000,000 

Stock outstanding, common 1,060,000 

Stock outstanding, preferred 990,000 

Total capital $58,976,465 

Securities held 10,932,603 

Approx. net capital $48,043,862 

Approx. net capit. per mile $66,084 

Average miles operated 727 

Net earnings on net capitalization 2.8% 

Stock on net capitalization 45% 

Fixed Charges on Total Net Income. . . 87% 

Factor of Safety 13% 

In the securities owned are included $5,000,000 D. T. I. bonds 
pledged as security for the collateral trust notes and $750,000 of 
the same bonds held in the treasury. The Ann Arbor stock is 
taken at the valuation given in the report, $5,099,000, which is 
very near the par value of the stock. The Ann Arbor company 
showed a surplus in 1906 sufficient to pay the full 5% on the 
$4,000,000 of preferred stock, and show nearly 7% on the com- 
mon. 

It will be seen that the approximate net capitalization of 
the road, earning in 1906, $5,488 per mile, was $66,084 per mile. 



DETROIT, TOLEDO & IRONTON 



295 



This stands against an estimated net capitalization of $78,000 
per mile on the Lake Shore, with gross earnings of $25,395 per 
mile. The net earnings for the system for 1906 showed 2.8% 
on the net capitalization as against 13% on the Lake Shore. 
Eliminating the securities issued in purchase of the Ann Arbor 
property, the D. T. I. proper showed net earnings in 1906 of 
1.4% on its net capitalization. 

Including the outstanding Ann Arbor stock, the total stock 
of the system represented 45% of the estimated net capitalization, 
but Fixed Charges consumed 87% of the Total Net Income, leav- 
ing but a very small Factor of Safety for the underlying securi- 
ties. Including all its Ann Arbor Collateral trust notes, the D. 
T. I. showed a deficit of $270,000, which is about equivalent to 
the interest charges on these notes. Excluding these latter 
the road barely earned its Fixed Charges on its own securities 
in 1906. 

Traffic and Earnings. 

On the Ann Arbor road the passenger business makes up 
about the usual percentage of the gross earnings; that is to 
say, a little less than 25%. Of its freight tonnage, the largest 
single item is bituminous coal, 23%, and lumber and logs, 27%. 
The balance of its traffic is broadly distributed. On the other 
hand the D. T. I. is almost exclusively a freight road, passenger 
earnings making up less than 10% of the gross. In turn, of the 
freight traffic, 59% is products of mines, of which the chief item 
is bituminous coal, 40%. These facts should be recalled in con- 
sidering the maintenance charges on the two parts of the system. 

The mileage and gross earnings of the two roads for five 
years compare as follows : 



Year 


Det. Sth. 
Mileage 


Gross 
Earnings 


Ann Arbor 
Mileage 


Gross 
Earnings 


Total 


Total 


1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


381 
381 
438 
436 
436 


$1,239,906 
1,444,900 
1,488,938 
1,468,299 
1,914,977 


292 
292 
292 
292 
292 


$1,893,410 
2,037,215 
1,979,047 
1,922,593 
2,175,231 


673 
673 
730 

728 
728 


$3,133,316 
3,482,115 
3,467,985 
3,390,892 
4,090,208 



It will be seen that the gross earnings of the combined 
roads were about stationary through the four years preceding the 
consolidation under a single management. 



296 



DETROIT, TOLEDO & IRONTON 



The increase in 1906 was due to the very general increase 
in tonnage distributed over both systems. The total tonnage 
of the Ann Arbor increased from 1,373,000 tons to 1,775,000 tons, 
while the tonnage of the D. T. I. increased from 1,783,000 tons 
to 2,249,000. This very heavy increase in traffic was obtained 
at a considerable reduction in the average rate received, the rate 
on the Ann Arbor declining from .67c. in 1905 to .56c. ; and on 
the D. T. I. from .50c. to .45c. The result was a very heavy 
increase in the traffic density, without a corresponding increase 
in the gross earnings. There was at the same time a very heavy 
cut in the ratio of operating expenses which took 78% of the 
gross of the combined roads in 1905, and only 67% in 1906. The 
report of the D. T. I. states "the road has benefited during the 
past year by the reduction of grades and the use of heavier 
engines. In 1906 we handled 391 tons of freight per train com- 
pared with 283 tons in 1905, an increase of 38%." 

It was by this means that, with a considerable reduction in 
the average rates received, the ratio of the cost of conducting 
transportation to gross earnings remained about the same. It 
was 37% in 1905 and 38% in 1906, on the D. T. I. and 33% and 
35% respectively on the Ann Arbor. 

Maintenance. 

It follows from the showing above that the heavy reduction 
of the operating ratio was accomplished not through a lowered 
percentage of the cost of conducting transportation, but through 
a lessened share of the gross earnings devoted to maintenance. 
The following table shows the maintenance charges on the D. T. I. 
for a period of several years : 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


487,252 
534,712 
490,805 
518,578 
756,277 

557,524 


$493 
537 
534 
725 
627 


$558 
607 
743 
724 
693 


$1,051 
1,144 
1,277 
1,449 
1,320 


Average 


$583 


$665 


$1,248 



DETROIT, TOLEDO & IRONTON 



297 





Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 


Wabash 

Lake E. & W. . . 
Vandalia 


880,032 
592,307 
910,426 


$1,332 

999 

1,184 


$1,370 

733 

1,683 


$2,702 
1,732 
2,877 



(Av. 1905-6) 

First as to the D. T. I., it will be seen that the traffic density 
rose in 1906 very nearly 50% over the previous year, while the 
amount of the total maintenance of way declined $102 per mile. 
There was likewise a lessened appropriation for maintenance 
of equipment. Comparing the road with two or three of its 
neighbors, it will be seen, for example, that the Lake Erie and 
Western, a Vanderbrt road, with about the same traffic density, 
spent in 1905 on the average $500 per mile more in maintenance 
than the D. T. & I. for 1906. This was also the actual difference 
in the total expenditures for maintenance in 1906 between the 
two roads ; while the traffic density of the Lake Erie and Western 
was considerably lower than the D. T. I. 

The maintenance items of the Ann Arbor for a series of 
years have been as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


654,966 
685,838 
700,619 
624,333 
661,934 
944,505 

712,032 


$1,194 
1,408 
1,288 
1,106 
1,056 
1,029 

$1,180 


$1,043 
918 
996 

1,092 
959 

1,028 

$1,006 


$2,237 
2,326 
2,284 
2,198 
2,015 
2,057 


Average 


$2,186 



It will be seen that likewise on the Ann Arbor, with an 
increase of traffic density in 1906 nearly 50% over the previous 
year, there was actually a less expenditure in maintenance of 
way but a slightly increased expenditure for equipment, so that 
the total expenditures for maintenance for the year were practi- 
cally the same with half again as much freight traffic and an 
increase of a quarter of a million dollars in gross earnings. 



298 DETROIT, TOLEDO & IRONTON 

Surplus Earnings. 

Despite a considerable increase in taxes, the Ann Arbor 
showed an increase in surplus of from $266,298 in 1905 to 
$430,704 in 1906. The surplus shown in 1906 was the highest 
in recent years, so that the increase for 1906 seemed very decided 
"improvement. But as already noted, this result was reached 
principally by a decreased percentage in the appropriations for 
maintenance. 

Net earnings on the D. T. I. increased from $153,000 in 1905 
to $559,000 in 1906. In 1905 appropriations for maintenance 
consumed 42% of the gross earnings ; in 1906 they consumed 
31%, or a reduction of about one fourth. 

As already noticed, the cost of conducting transportation in- 
creased slightly. In the same year, interest and taxes increased 
nearly $400,000, in which the principal item was $275,000 interest 
on the collateral trust notes, against which the road received no 
direct income. As a result of this increase in charges the 
deficit for the year remained about the same as that of the pre- 
vious year, that is to say, $279,941. Had the Ann Arbor paid 
5% on its preferred stock, as it was amply able to do, the D. T. 
I. would have received from this source $155,000, and there would 
have still remained a divisible surplus, equivalent to 7%. Had 
the entire amount of this divisible surplus been distributed, the 
share of. the D. T. I. would have been another $155,000, so 
that the combined amounts would have paid the interest charges 
and left something over. 

The Ann Arbor road had an actual cash balance of current 
assets over current liabilities at the close of the year considerably 
exceeding its earnings for the year, so that the system did not 
have to borrow money outside to meet the nominal deficit. 

The Balance Sheet. 

At the close of the fiscal year of 1906 the Ann Arbor road 
showed : 

Current assets $1,129,580 

Current liabilities 427,857 

Leaving a working balance of $701,723 

There were items of cash in the treasury of $43,280, and cash 
in other depositaries, $828,021. The credit to Profit and Loss 
was, $1,258,671. 



DETROIT, TOLEDO & IRONTON 299 

During the year the Ann Arbor road paid in back taxes to 
the state of Michigan, $339,392, charged to Profit and Loss. This 
amount was due under the new Michigan tax law, the legality 
of which had been contested by the railroads of that state but 
finally decided in the state's favor. The net increase of the Profit 
and Loss credit for the year was therefore only $91,000. 

The balance sheet of the D. T. I. showed 

Current assets $521,700 

Current liabilities 496,347 

Leaving a working balance of $25,353 

There were items of cash in the treasury of $49,025, and 
cash in other depositaries of $156,373. 

The debit to Profit and Loss at the close of the year was 
$305,380, an increase of $270,941 for the year. 

Investment Value. 

There is outstanding about $1,000,000 of Ann Arbor pre- 
ferred, and somewhat more than this amount of the common 
stock. If the D. T. I. remains solvent, the possessors of this 
stock should be in a very comfortable position, for the D. T. I. 
has paid for 70% of this Ann Arbor stock a sum practically 
amounting to par for both the common and the preferred, and 
against this purchase has issued notes bearing a high rate of 
interest. The only way that it can get even is to declare divi- 
dends equal to the full 5% on the preferred and at least 5% on 
the common, and, as we have seen, the Ann Arbor nominally 
earned such dividends in 1906. The alternative to this would 
be for the D. T. I. to borrow the amount of its deficit from the 
Ann Arbor. 

The very interesting question then is whether the combined 
roads will be able to keep up the very handsome increase of 
business shown in 1906, and somewhat improve this. If this 
could be done, Ann Arbor stock would be an excellent thing to 
have and to hold ; or it would be, save for the fact that minority 
shareholders have not in general been fortunate in the vicissitudes 
of changing systems. 

The $25,000,000 of outstanding capital stock of the D. T. I. 
was issued as follows: $1,000,000 of the first preferred, and 
$800,000 of the second preferred to the underwriting syndicate 



300 DETROIT, TOLEDO & IRONTON 

which furnished cash for the reorganization of the road, in 
addition to the bonds they received; $6,500,000 of the first pre- 
ferred stock to the preferred stockholders of the Detroit Southern 
who paid an assessment of $10 per share in cash ; $4,200,000 of the 
second preferred to common stockholders of the Detroit South- 
ern paying an assessment of $5 per share in cash. The 
entire amount of the common stock went to the reorganization 
managers "for furnishing the cash and for other considerations." 
Apparently therefore, the subscribers of $2,675,000 of the con- 
solidated mortgage bonds received a bonus of $1,000,000 of the 
first preferred, $800,000 of the second preferred, and $12,500,000 
of the common stock, or a total of nearly $17,000,000 face value 
of securities for a presumptive outlay of $2,675,000. 

The value of this stock, present or prospective, the in- 
dividual investor will best be able to decide for himself. With 
fixed charges in the highly prosperous year of 1906 consuming 
about 87% of the total net income, it would seem that were a 
business reaction to come this consolidation would hardly fare 
better than the C. H. & D.-Pere Marquette merger, under the 
same auspices and with the same generous issue of securities. 

Should the extension into the Kentucky coalfields be com- 
pleted, this would undoubtedly add very heavily to the traffic of 
the road, but it is understood that this extension is to be built 
independently, and if it were afterwards added to the system on 
the same basis as the reorganization of the Detroit Southern or 
the purchase price of the Ann Arbor stock, it is obvious that the 
system would pay well for what it gained. 



DULUTH, SOUTH SHORE AND ATLANTIC 

RAILWAY. 

The Duluth, South Shore & Atlantic is a subsidiary line of the 
Canadian Pacific, operating from Duluth to Sault Ste. Marie, 
through northern and peninsular Michigan, with branches into 
the Calumet mineral district. It is largely an ore road; its 
traffic is not heavy, and its capitalization enormous. To judge 
from the reports, it is kept alive largely by the bounty of the 
parent road. 

The road represents the consolidation, in 1886, of several 
small lines, and in 1887, the Marquette, Houghton and Onton- 
agon and the Marquette and Western were leased and later pur- 
chased outright. 

Ownership. 

The majority of both common and preferred is owned by 
the Canadian Pacific Railway. In addition to this, the Canadian 
and Pacific held in its treasury the entire amount of the 4% 
consolidated mortgage bonds, $15,107,000, and of $3,000,000 In- 
come Certificates ; advanced $236,000 on car trusts, and had other 
guaranteed interest advances to the amount of $3,589,395, to 
say nothing of an open account of $323,000 additional. 

The holdings of stocks and bonds and advances by the 
Canadian Pacific nominally represent, therefore, a total of $33,- 
456,000. This is equivalent to $56,000 per mile of road, and is a 
great deal more than the road is worth. And the company has 
$15,500,000 of other stocks and securities outstanding. 

The item of $3,589,395 of guaranteed interest advances does 
not, it is to be noted, appear as a separate item in the report of 
the Canadian Pacific Railway. 

The directorate is controlled by representatives of the Canadian 
Pacific. 

(301) 



302 DUUJTH, SOUTH SHORE & ATLANTIC 

Capitalization. 

The capital account on June 30th, 1906, showed as follows: 

Common stock $12,000,000 

Preferred stock 10,000,000 

Income Certificates 3,000,000 

Total stock $25,000,000 

Funded debt 20,000,000 

Car trusts 406,493 

Can. Pac. Guar. Int. advances 3,589,395 

Total debt $23,995,888 

Total capital $48,995,888 

Approx. capitalization per mile $82,620 

Average miles operated 593 

Net earnings on total capitalization... 2% 

Stock on net capitalization 51% 

Fixed Charges on Total Net Income. . . 115% 

Factor of Safety — 

A capitalization of $82,620 per mile of road with a traffic 
density of 382,800 tons, and gross earnings of only $5,159 per 
mile is not a very favorable showing. It compares with a gross 
capitalization of $42,800 per mile of the companion Sault Ste. 
Marie, with earnings of $5,728 per mile. 

The net earnings show only 2% on the total capitalization, 
which is only about one-third the general average for the country. 
In other words, the capitalization is about three times too high. 

Morever, this capitalization is not largely in the form of 
stock, which earns nothing and draws nothing; excluding the 
$3,000,000 of income bonds, very near one-half of it is indebted- 
ness drawing interest. 

Even excluding the income bonds, the indebtedness of the 
road alone amounts to over $40,000 per mile, and after taxes have 
been deducted from the total net income, the surplus earnings 
of the road did not amount in 1906, to more than 3% on the 
interest paying indebtedness. 

It is not surprising, therefore, to find the road steadily 
"earning a deficit," year after year. It amounted to $150,302 in 
1906. 



DULUTH, SOUTH SHORE & ATLANTIC 303 

This was in the face of no very heavy maintenance charges, 
which in 1906 amounted to only $702 per mile for the mainten- 
ance of way, and $379 per mile for equipment. Nearly half of 
the traffic of the road is ore traffic, and the maintenance of this 
is naturally low. In no other way could such maintenance 
charges be regarded as adequate. 

The gross earnings for 1906 for the first time were over 
$3,000,000. They have fluctuated between that and $2,500,000 
for a number of years. 

Yet with but very slightly increased maintenance charges, 
amounting to a total of only $78,000 for the year, the road was 
still unable to earn its interest obligations. In consequence, 
there was a further debit to profit and loss, and this item on 
the balance sheet at the close of the year, amounted to $2,616,756. 

It does not appear that there were any unusual charges, 
although "construction," charged to operating expenses, amounted 
to $341,309. 

The balance sheet at the close of the year showed a debit 
balance of about $1,000,000, offset by a nearly equal amount of 
advances to other companies. The amount of cash in the treasury 
was $43,000. 

It is scarcely worth while to discuss the investment value 
of the Duluth South Shore stock. Its gross earnings have not 
been rising steadily as other American roads' have been doing; 
the earnings per mile were rather smaller in the years of 1904 
and 1905 than in the year of 1903. There is little therefore to 
indicate that a steady increment of earnings will soon bring 
the road into better shape. 

Before anything can be paid upon the income certificates, 
the net earnings of the road will have to increase by $150,000 
to $200,000, even if maintenance is kept down to its present 
apparently rather low figure ; and in turn, the 4% on the $3,000,- 
000 of income certificates would require an additional $120,000 
before any surplus for stock could be shown. 

The company is apparently in need of working capital, 
which it secures by further borrowings from the parent road, 
and its interest obligations are steadily increasing rather than 
decreasing. 

If this is the showing for a year of such unparalleled pros- 
perity as 1906 it is not very difficult to see what would become 
of the road in less prosperous times. The road would scarcely 



304 DULUTH, SOUTH SHORE & ATLANTIC 

sell on a better basis than a valuation showing 4% of net earnings 
over taxes. Supposing maintenance adequate, this, on the earn- 
ings of 1904-5 and 1905-6, would give a cash valuation for the prop- 
erty of rather under $18,000,000. Were the Canadian Pacific 
to pay the outstanding obligations, its $33,456,000 of stock, bonds 
and debt would, on this basis, show a cash valuation of not more 
than $13,000,000. 

Apparently, therefore, the Canadian Pacific could gain little 
by foreclosure. On the other hand, it is too heavily committed 
to the fortunes of the road to let it go. One may infer, therefore, 
that it will continue to put up the deficit in the hope that 
eventually, possibly through extensions, the road can be put on 
a paying basis. 

Meanwhile it is difficult to see what possible value the 
shares of the road can have. Since absolute control is held by 
the Canadian Pacific, the floating supply is worth nothing to 
any other road. 

In order to earn even one per cent, on the preferred stock, 
the earnings over taxes, — the surplus before interest, — would 
have to be increased nearly 50%, even supposing present rates 
and present maintenance are unchanged, and saying nothing of 
the need of current funds. 

Yet how this is to be achieved in the face of steadily de- 
clining freight rates, it is not easy to see. The rate for 1893 
was 1.05c, for 1905, .93c, and for 1906, .85c; and even 
these latter figures are high compared with the general average 
of American tariffs. 

It is to be noted, morever, that the present showing of a 
deficit is not a steadily decreasing factor, growing less through 
a series of years. In 1902 the road was able to show a small 
surplus, with about the same average of maintenance charges. 
In the four succeeding years the deficit has ranged from $30,000 
in 1903 to $283,000 in 1904, with little change in maintenance 
charges. 

In five years the price of preferred stock has ranged from 
$10 to $45 per share. The price of the common stock in the same 
period has ranged between $4 and $22. The high price was for 
1906, and based upon the situation shown in the above analysis. 

It is difficult to believe that any serious minded investor 
purchased stock at the levels of 1906. The preferred at around 
$10 or $15 per share, the common stock at half these, might show 



DULUTH, SOUTH SHORE & ATLANTIC 305 

a speculative buyer a handsome profit, through the fluctuations 
in value; but those seeking solid investments will probably con- 
clude that the market has many more attractive purchases. 



20 



ERIE RAILROAD. 

More than any other American line, the Erie is a railroad 
with a history; and even in a country where scandals and mis- 
management were not infrequent, the story of the Erie stands 
out in bold relief. Its annals go back to the halcyon days when 
Daniel Drew ran printing presses overtime to manufacture stock 
for Commodore Vanderbilt to buy; when Jay Gould restored to 
the road the modest sum of ten millions, because, so the chronicle 
runs, "he feared to shared the fate of his partner, 'Jim' Fisk, 
who was murdered;" when the offices of the company were 
carried about in the pockets of Fisk, Gould, et al., to escape 
suits and injunctions; and the road was in general simply an 
extensive gold brick which its possessors used in the promotion 
of their highly ingenious and often amusing swindles. 

All this belongs to an ancient day and since its reorganization 
at the close of 1895, the Erie has been admirably conducted; 
large sums have been spent in improvements ; its earnings have 
slowly but steadily increased; and while it is loaded with a 
rather heavy burden of overcapitalization, its securities have 
acquired in recent years a much greater degree of stability than 
they ever before possessed. 

The Erie operates its own lines from New York to Chicago, 
the average mileage amounting to 2,151 miles, of which more 
than one-third has second or double track. It has valuable 
coal properties, which have helped towards the stability and the 
increase of its traffic; and its gross earnings in 1906 exceeded fifty 
millions of dollars. Its earnings per mile and its freight den- 
sity exceed that of the New York Central, a very notable fact. 

History. 

The New York and Erie was chartered as far back as 1832 
to construct a direct line from tidewater to Lake Erie, to avoid 
the circuitous route of the Hudson and central New York. Con- 
struction began in 1836 but its variegated financial troubles 

(306) 



ERIE 307 

began almost at the same time and the through line to Lake Erie 
was not opened until 1851. It was originally projected to run 
from Piedmont, about twenty miles above New York on the west 
bank of the Hudson, where a new metropolis was to be built 
outright. The remains of the long piers, stretching out into the 
Hudson, which were to be the foundations of this ambitious 
dream, are still to be seen. The road collapsed in 1859 and was 
reorganized as the Erie Railway with the famous Daniel Drew as 
president and treasurer. The Drew regime lasted until 1868 when 
Jay Gould and "Jim" Fisk obtained control, the operations of 
these gentlemen lasting through four spectacular years. There 
was another reorganization in 1876, and for a time the road was 
not only prosperous, but fairly well managed, and paid divi- 
dends. 

The legacy of debt which was left to it, however, was too 
heavy and it went down with so many other roads in the general 
collapse of 1893 to be reorganized into the present company 
under the more or less recognized domination of the Morgan 
interests in 1895. 

Since the reorganization the mileage of the road has in- 
creased but slightly and the main effort has been towards re- 
building and upbuilding the road. 

Ownership. 

The Erie stands somewhat apart from distinct ownership 
by other great systems, though it is a part of the community of 
interest organization. Up to 1904, when the voting trust was 
dissolved, the road was directly under the control of Morgan 
interests and nominally so remains. 

On the directorate the Morgan interests are represented by 
Charles Steele, of the firm of J. P. Morgan and Company 
and Francis Lynde Stetson; and in more or less close 
association with these are William C. Lane, president of the 
Standard Trust Company; Louis L. Stanton, vice-president of 
the same ; James J. Hill, president of the Great Northern and 
George F. Baker, president of the First National Bank. New 
York Central interests are represented by H. McK. Twombly; 
and D. O. Mills is also a director in the New York Central as 
well as Mr. Baker. Other directors include E. H. Harriman, 
president of the Union Pacific, also a director in the Delaware 
and Hudson; Alexander E. Orr, vice-president of the Delaware 



308 ERIE 

and Hudson and president of the New York Life; Norman B. 
Ream of Chicago, also a director in the Lehigh Valley, the 
Baltimore and Ohio and other roads ; John J. McCullough, of 
Vermont, also a director in the Atchison ; James J. Goodwin and 
William Pierson Hamilton, identified with insurance interests 
in New York, and F. D. Underwood, president of the Erie, also a 
director in the Toledo and Ohio Central. Mr. Hill presented 
his resignation as a director in 1906, but his resignation was 
ignored at the succeeding annual meeting. 

Of the Erie directors, four are also directors in the Lehigh 
Valley, three in the New York Central, two in the Lackawanna, 
two in the Delaware and Hudson, two in the Reading, and three 
in the Baltimore and Ohio, all more or less competing roads. 

Directly the Erie has no close affiliations with other lines 
other than with the New York, Susquehanna and Western, which 
it owns ; but it is one of the five roads which own an extensive 
block of Lehigh Valley stock and practically control the affairs 
of that corporation. The extent of the Erie's holdings are not 
specified. 

In 1905 the Erie reported 4,309 shareholders. 

Capitalization. 

Low capitalization has not generally been characteristic of 
Morgan reorganizations and the Erie in its reorganized form, 
presents no exception. On June 30th, 1906, its capital account 
stood as follows: 

Common stock $112,378,900 

1st Preferred 47,892,400 

2nd Preferred 16,000,000 

Total stock $176,271,300 

Funded debt 206,634,900 

Equip. Trusts 15,064,205 

Total capital $397,970,405 

Rentals capit. at 4% 31,687,500 

Approx. gross capital $429,657,905 

Securities held 110,888,864 

Approx. net capital $318,769,041 



ERIE 309 

Approx. net capitalization per mile $148,260 

Average miles operated 2,151 

Net earnings on net capitalization. . . . 4.8% 

Stock on net capitalization 52% 

Fixed Charges on Total Net Income. . 66% 

Factor of Safety 34% 

It will be seen that the larger part of the road's capitalization 
is represented by its own stocks and bonds, and that the capita- 
lization of rentals paid adds but little to the total. 

Deducting from the gross capitalization $110,000,000 of 
nominal sucurities held, whose nature is not specified in the 
reports, the estimated net capitalization amounts to $148,000 
per mile, a sum considerably higher than that of the New York 
Central. On this estimate, the net earnings of 1906 showed only 
4.8%, as against 5.8% for the New York Central, 8.1% for the 
Pennsylvania, 13.7% for the Lackawanna, and 14.7% for the 
Lehigh Valley. It will be seen therefore that in comparison with 
earnings the capital is high. 

About half of the estimated capitalization, however, is re- 
presented by stock, on the large majority of which no dividends 
have ever been paid. 

The Fixed Charges are high, consuming even in the record 
year of 1906, 66% of the total net income, leaving a margin of 
safety for the underlying securities of, only about 33%. This 
margin is about the same as that of the New York Central, but it 
is very considerably below the average of solid roads. On the 
Lackawanna, for example, the Factor of Safety is 62%, and on 
the Pennsylvania 62%. 

Equities Owned. 

Of securities to the nominal value of $110,000,000 owned by 
the Erie, the reports of the road give very little detail. The 
income from these securities in 1906 was only $483,000, or not 
one-half per cent, on the nominal valuation. 

The Erie owns practically all of the capital stock of 
the New York, Susquehanna and Western, amounting to $13,- 
000,000 preferred and $13,000,000 common, of which about half 
is deposited under the Pennsylvania Collateral Trust Mortgage 
and the balance held free in the treasury. This stock was 
acquired in 1898 when Erie first preferred and Erie common 
was offered share for share for the Susquehanna stock. No 



310 ERIE 

dividends have been paid upon this stock since 1892 and none 
are in sight, since with no excessive charges in 1906, the road 
earned a deficit. If this $25,000,000 and more of stock is carried 
on the balance sheet of the Erie, as it is apparently the case with 
the unpledged stock in the treasury, it is obvious that while 
this might be legitimately employed to rebate the nominal 
capitalization of the Erie, it represents no cash assets of any such 
value, and the Erie's equity in this holding is represented by a 
deficit. 

The Erie's most valuable asset is its coal holdings. With 
the exception of the directors shares, the Erie holds the entire 
capital stock of the Pennsylvania Coal Company, the Hillside 
Coal and Iron Company, Blossburg Coal Company, and the 
Northwestern Mining Exchange Company. The larger part 
of these stocks were acquired in 1901 and their purchase was 
paid for by the issue of $32,000,000 Pennsylvania Collateral 4% 
gold bonds and $5,000,000 of the first preferred stock. 

The operations of these companies are not detailed in the 
report, only their consolidated balance sheet and net earnings being 
shown. In 1906 these net earnings amounted to $1,595,140, 
but after paying interest on bonds outstanding and setting aside 
$320,541 to the sinking fund of the Pennsylvania Coal Company, 
the balance sheet showed a deficit of $45,000 to the Erie Com- 
pany. When the five millions of preferred stock also issued in 
exchange for these companies is computed at 4%, it will be seen 
that the advantages of the purchase to the railroad did not show 
directly in its income account. The holdings of these companies in 
coal lands are enormous, the coal acreage of the Pennsylvania Coal 
Company being 12,600 acres, and the unmined coal estimated at 
180,000,000 tons; the Hillside Coal and Iron Company, 7,200 
acres, and 70,000,000 tons of unmined anthracite ; or a total of 
250,000,000 tons. In considering the assets of the Reading and 
other anthracite roads, their holdings of unmined coal have been 
reckoned at a minimum value of 10 cents per ton ; and if this were 
taken as a basis of valuation, the Erie would have an asset in its 
coal holdings of something like $75,000,000. The holdings of 
bituminous coal are also large. These coal properties at the present 
time are earning about 4% on the $37,000,000 of securities issued for 
their purchase. Whether this represents the full net earnings of the 
properties or no is none too clear, but it seems reasonable to suppose 



ERIE 



311 



that with the steady accretion in the value of these coal fields the 
Erie should have a large if at present indeterminate asset. 

Increase of Capitalization. 

Since 1900, the Erie's funded debt has increased about $75,- 
000,000 and its preferred stock $5,000,000. Of this, $33,000,000 
in bonds and the $5,000,000 of preferred stock represents the 
purchase of the coal stocks ; and $22,000,000 of bonds was the new 
convertible issue designed primarily for the purchase of the Cincin? 
nati, Hamilton and Dayton stock, but after the abandonment of that 
enterprise, turned into improvements on the road. The increase of 
capitalization amounts to 25% and the gross earnings to about an 
equal amount, but as the coal issues about pay for themselves, the 
increase in rail earnings has been somewhat in excess of the in- 
crease in capitalization. The items stand as follows: 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1899-00 
1905-06 


$112,357,410 
112,378,900 


f $42,882,8001 
I 16,000,000/ 

/ 37,892,4001 
1 6,000,000/ 


$146,070,900 
221,699,105 


$317,311,100 
397,970,405 


$38,293,032 
47,461,401 



Character of Traffic. 

Of the total tonnage nearly half, or about 47%, is made up 
from coal and coke, in about equal amounts of anthracite and 
bituminous. The 17,000,000 tons of coal and coke yielded a 
revenue of $12,000,000; the 19,000,000 tons of merchandize freight 
yielded a revenue of $23,000,000, so that the merchandise earnings 
are very considerably in excess of the coal revenue. 

The average rate per ton per mile was .60c, a slight de- 
crease from the previous year. 

The coal earnings have grown very much more rapidly 
than the merchandize earnings. In the first year of the re- 
organized company the coal earnings were only $6,660,000 
against $16,766,000 of general freight. This means that the char- 
acter of the traffic is changing in exactly the opposite sense to 
that of the Reading, for example, and instead of becoming less 



312 



ERIE 



and less dependent upon a single industry the Erie is becoming 
more so. This is not a fact which makes for the stability of 
its earnings. 

Stability of Earnings. 

From the last year of the receivership to 1906, the earnings 
and mileage have stood as follows : 



Year 


Miles Operated 


Gross Earnings 


Earnings per Mile 


1895-6 


2,098 
2,125 
2,124 
2,109 
2,109 
2,156 
2,154 
2,153 
2,150 
2,151 
2,151 


$31,645,487 
• 31,495,031 
33 ,740 ,860 
33 ,752 ,703 
38,293,032 
39 ,102 ,302 
38,409,225 
43,509,139 
43,005,213 
43 ,321 ,647 
47 ,461 ,401 


$15,083 
14,821 


1896-7 


1897-8 


15,885 


1898-9 


15,529 


1899-0 


18,156 


1900-1 


18,138 


1901-2 


17 ,833 


1902-3 


20 ,208 


1903-4 


20 ,000 


1904-5 


20,140 


1905-6 


22 ,065 







It will be seen that with a very slight increase of mileage, 
the gross earnings and likewise the earnings per mile have 
increased more than 50%. 

The Erie has been benefitted very considerably by the in- 
troduction of the Community of Interest idea, the average rate 
per ton having declined to .52c. in 1899. The difference of 
eight-tenths of a mill in the increased rate of 1906 represents in 
the earnings of that year about $4,800,000, or about one-third 
of the increase in earnings over 1896. 

Maintenance. 

Like other roads of its class, the Erie has been charging its 
maintenance in steadily increasing amounts, the total increase 
from 1901 amounting to $2,000, per mile, or more than 40%, on 
an increase of traffic density of only about 22%. The items for 
the six years have stood as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


2,314,277 
2,203,036 
2,511,542 
2,413,562 
2,401,672 
2,764,827 

2,434,819 


$1,989 
1,848 
1,697 
1,841 
1,652 
2,139 

$1,861 


$2,809 
2,602 
2,662 
3,055 
3,533 
4,037 

$3,116 


$4,798 
4,450 
4,359 
4,896 
5,185 
6,776 


Average 


$4,977 



ERIE 



313 





Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




Lackawanna . . . 
Lehigh Valley . . 

Reading 

N. Y. Central . . 


3,163,799 
2,771,846 
3,420,895 
2,070,251 


$4,991 
2,588 
3,033 
2,722 


$3,608 
3,429 
5,181 
3,033 


$8,599 
6,017 

8,217 
5,755 



Although the Erie's charges have been undoubtedly heavy, 
it will be seen that they have averaged considerably below that 
of four other representative roads of the same class. If we aver- 
age the charges of the New York Central, the Lackawanna, the 
Lehigh Valley and the Reading, it will be found that these four 
roads spent through these six years $7,000 per mile per annum, 
which is an excess of $2,000 per mile or 40% over the average 
charges for the Erie, with an average difference of freight density 
of only 16%. This average charge of these four roads was in 
excess even of the heavily increased charges for the Erie in 1906. 
In other words, the Erie's charges were not up to the standard set 
by competitive roads of the same class. If, therefore, any attempt 
were made to scale the Erie's charges materially below the figures 
of recent years the road would inevitably fall behind other roads of 
its class. It would seem dubious policy therefore, for the investor 
to count upon any considerable amount of concealed surplus in 
these items. If several standard roads pursue a nearly similar 
policy, as it is evident that the standard roads mentioned have done, 
it is obvious that other roads in the same class must more or less 
meet this standard in order to keep up their end of the game. 

Improvements From Earnings. 

From 1901-2 the maintenance charges show a decrease of 
about $350 per mile. This was due to a change in bookkeeping 
methods, and the report of the president stated that in 1901 and 
the year previous considerable sums had been expended on im- 
provements, the cost of which was charged to operating ex- 
penses. Since 1902 there has been a separate item for these im- 
provement charges. Adding the sums for the two previous 
years, the amounts set aside from earnings for improvement pur- 
poses stand as follows : 

1899-00 $1,177,040 

1900-1 1,153,540 

1901-2 1,257,857 

1902-3 2,377,856 



314 



ERIE 

1903-4 1,540,320 

1904-5 1,360,555 

1905-6 1,926,973 



Total $10,794,141 

These are nothing like the sums set aside by the Lacka- 
wanna, for example, but they at least show a disposition of the 
management to pay for improvements from earnings so far as 
earnings will justify, and taken in connection with the liberal 
maintenance shown especially in 1905 and 1906, they go to ex- 
plain why it has been possible to keep down the cost of conduc- 
ting transportation in the face of increased business. 

Surplus Earnings. 

The surplus shown over and above these maintenance 
charges and Fixed Charges since 1901, but before charging out 
Improvement Appropriations, stands as follows: 



Year 


Surplus 


Dividends on 

1st Preferred 

Stock 


Per cent. 

Earned on 

Common 


Average 
Price 


1900-1 


$2,823,157 
4,384,676 
8,433,266 
4 ,552 ,053 
4 ,406 ,596 
5,016,643 


1* 

3 

3* 

4 
4 
4 


2.2% 

1.6 

5.2 

1.7 

1.6 

2.2 


23 


1901-2 


39 


1902-3 


31 


1903-4 


28 


1904-5 


47 


1905-6 


44 







(4% was paid on Second Preferred 1905-6). 

Between 1903, when a larger surplus was shown than in any 
of the years under view, and 1906, there was a difference in 
maintenance charges amounting to $1,400 per mile, and this on 
the 2,150 miles of railroad, represents a difference of nearly three 
million dollars. This is nearly the difference in the surplus 
shown, and this difference of 30% in the maintenance charges 
per mile was on a difference in freight density of only about 10%. 

In the same period the cost of transportation has increased but 
slightly, and relatively to the traffic density has decreased, show- 
ing that the heavy charges for maintenance are bearing fruit. 
If the Erie could be normally maintained on the basis of 1903, 
it would therefore be comfortably earning four or five per cent. 
on its common stock over and above the preferred dividends ; 
but for the reasons already stated this is a misleading process of 
reasoning, and it is likely that the surplus shown in 1906 repre- 
ents much nearer a safe and legitimate surplus than that of 1903. 



ERIE 315 

Dividend Record. 

The Erie in the old days was never a dividend earner save 
for stock market purposes. The reorganized company paid no 
dividends on its stock whatever for its first six years. It began 
paying a dividend on its first preferred in 1901, the full 4% being 
paid in 1904 and since. In 1905 and 1906 the 4% was paid 
on the second preferred. 

The Balance Sheet. 

At the close of the fiscal year of 1906 the balance sheet 
showed : 

Current assets $11,994,909 

Current liabilities 7,372,970 

Leaving a working balance of $4,621,939 

Of the current assets, $7,501,830 was in cash. In addition 
to the items shown under these heads, there was cash with the 
trustees for new equipment of $8,476,800 ; materials and supplies 
on hand, $3,882,049, and due from subsidiary companies, 
$3,644,418. 

The amount to the credit of Profit and Loss was $11,979,461. 
Balancing these items was about three and a half million 
dollars due for interest and dividends accrued. 

Investment Value. 

At the annual meeting of 1906, President Underwood said 
that the important grade reductions between Port Jervis and 
Jersey City, mentioned in the annual report, would be completed 
in a year. The report stated that the grades, with one exception, 
would be reduced to a maximum of 0.2 per cent, eastbound, and 
0.6 per cent, westbound, as compared with 1.25 per cent, on the' 
present line. 

What this means to operation Mr. Underwood illustrated by 
saying that on the new grades 19 engines could do the work now 
done by 43 engines. 

President Underwood said further that Cleveland was 
rapidly becoming the most important city between New York 
and Chicago in the Erie's territory and that therefore the Erie's 
plan to have a direct east and west line through the city meant 
much to the future position of the road. While on the map the 



316 ERIE 

plan to form a loop to Cleveland by constructing a small amount 
of mileage west of the city and using trackage of the Big Four 
might seem to be roundabout, in reality it would give the Erie 
a line from Cleveland to Chicago six miles shorter than any other 
and from Cleveland to New York as short as any. 

The contract under which the McAdoo tunnel companies 
will carry Erie passengers into Manhattan was still under negoti- 
ation. President Underwood said the Erie did not contemplate 
the construction of its own tunnel at any time, but the contract 
would provide that after a stated time the Erie might run its own 
electric trains through the tunnels. The question of terms was 
the principal one delaying the conclusion of the contract. The 
electrification of the lines within 25 miles of New York still en- 
gaged the attention of the company's commission of experts. As 
soon as they had made their report and the funds had been pro- 
vided, the work would be undertaken. 

Reference having been made to the effect of the coal strike 
upon the year's earnings, President Underwood remarked that 
he considered a cessation of mining as business merely deferred, 
not lost. He added : 

"A more serious menace, and the chief one to which the 
Erie is exposed, is the growing export trade of the gulf ports, 
principally New Orleans and Galveston. The distance from 
Chicago to tidewater is about the same whether to gulf or At- 
lantic ports, but the former have the advantage of two practically 
water-level routes, while the eastern trunk lines have to haul 
across a mountain chain. Formerly we could rely upon the fact 
that nearly all the shipping came to this port, but now the ship- 
ping has a tendency to go to the gulf. 

"The only thing to be done about it is to put our lines in the 
best possible condition to handle the business expeditiously and 
at low cost. Our competitors have made great improvements in 
their lines in recent years, and we must do the same." 

Such being the immediate prospects we may consider the 
investment value of the stocks. Both the first and the second 
preferred stocks are limited to non-cumulative dividends of 4% 
and the company has the right to retire these preferred stocks 
at par in cash. 

Erie first preferred sold as low as $30 per share in 1900 be- 
fore the dividend era began. Upon the payment of the full 4% 
dividend in 1904, it sold as high as §77 per share, in 1905 at $85, 



ERIE 317 

and in March, 1907, at $57. At an average price of about $66 per 
share the stock yields 6% with a fair margin of safety for the 
dividend. The $48,000,000 of first preferred requires a little less 
than $1,900,000 and the average surplus for six years shown after 
fairly heavy charges was nearly $5,000,000 per annum. These, 
it is true, were years of extraordinary prosperity ; but in conse- 
quence of the heavy improvements which have been carried out, 
the property is in a condition that it never was in before, and its 
earnings are very considerably greater. 

But becoming more and more dependent upon the coal in- 
dustry for its earnings, Erie is not in the same position as other 
roads with more widely distributed traffic. It is easy to see that 
with prolonged labor difficulties in a single industry, its earnings 
could be very seriously impaired, though in case of decreased 
earnings it is in a position now to scale its maintenance charges 
without impairing the efficiency of the road. Limited to 4% and 
redeemable at par, the first preferred has no great speculative 
possibilities, and with 1906-7 rates for money the investor will 
probably conclude that even on a 6% selling basis, the stock was 
not over cheap. On this basis, however, it might show good 
returns, should money conditions improve and the heavy capital 
requirements of the road not prejudice the safety of its dividend. 

The second preferred amounts to only $16,000,000; the 4% 
dividend requires, therefore, $640,000 additional; and on the 
same basis noted above, it is to be regarded as a rather specu- 
lative security. In 1904 when its dividend was begun, the stock 
could have been bought for $33 per share. It sold as high as $78 
per share in 1905 and showed an average price of about $70 per 
share in 1906; in March, 1907, it sold at $35. From these figures 
it is evident that its security is not highly regarded. Neverthe- 
less, bought at anything like 1907 prices, and held, it might yield 
a handsome speculative profit in time. It is not to be regarded 
otherwise than as a speculation. 

It is obvious that no dividend could be paid on the enormous 
amount of common stock outstanding unless the dividend on 
both the preferred stocks were thoroughly assured. 

Erie common represents one of the "low price" favorites 
of the Stock Exchange, and because of the huge quantity of 
stock outstanding ($112,000,000), the expectation of a dividend 
has not been very great. In 1902, on account of the heavy in- 
crease of the earnings shown, the stock was run up to $44 per 



318 ERIE 

share. It declined to $21 per share in 1904, rising to $52 in 
1905. It did not again reach the latter figure even under the 
exceptional showing of 1906 and sold again at $20 in June, 
1907. It is evident that bought at the low figures the stock repre- 
sented in this period an enormous opportunity for profit, but it 
is to be recalled that the slump of 1903-4 was a stock market 
slump and that the general business of the country was very 
little affected. The stock market recovery, therefore, was ex- 
tremely rapid. Precisely a repetition of this is not likely to occur 
soon. Of course, if the steady increase of earnings through six 
years could continue, even in somewhat abated degree, the stock 
might receive a small dividend within a few years, but there are 
probably many other non-dividend stocks on the list which will 
receive dividends before Erie common. 

Erie Convertibles. 

The Erie has outstanding two series of 4% convertible bonds, 
$10,000,000 of Series "A," convertible into common stock at 50 
and $12,000,000 of Series "B," convertible into the same stock 
at 60. In 1906 Series 'A" was quoted as high as 109 and was not 
quoted below par throughout the entire year. In March of 1907 
these bonds sold down to 76, declining in sympathy with the fall 
of the common stock from above 50 to below 22. A quotation 
of 50 on Erie common could be due only to speculative excite- 
ment and clever manipulation. Obviously the price of the con- 
vertibles would follow this, so long as there seemed a remote 
chance of profit. As soon as this prospect faded, the bonds sold 
on their merits as a 4% obligation, subject to many prior liens. 
It seems improbable that Erie common will sell much above 
$50 per share for many years to come and the conversion feature 
of these bonds, therefore, is of value only in so far as the stock 
might be again run up to these high quotations. Convertible into 
Erie common on a basis of $50 per share, obviously the bonds 
would show a profit whenever the price of the common exceeded 
one-half the amount paid for the bonds. Probably only a return 
to such conditions as those of 1902 or 1906 would make this 
feature of any value. 



EVANSVILLE AND TERRE HAUTE 
RAILROAD. 

(Including Evansville & Indianapolis Railroad). 

The Evansville & Terre Haute is now one of the smaller sub- 
sidiaries of the Rock Island system — that is to say, a large ma- 
jority of its stock is owned by the Chicago & Eastern Illinois, 
which is in turn owned by the St. Louis & San Francisco, which 
in turn, is controlled by the Rock Island Company. In 1906 the 
reports of the Evansville & Terre Haute included the operations 
of the Evansville & Indianapolis Railroad, all of whose stock 
($2,000,000) is owned by the former. Prior to 1905-6 the Evans- 
ville & Indianapolis was operated separately. 

The operations for 1906 covered 310 miles of track, extend- 
ing from Terre Haute, where the road joins the Chicago & 
Eastern Illinois, to Evansville and Mt. Vernon on the Ohio River, 
with a parallel line from Evansville northward to Brazil, Indiana. 

As of June 30th, 1906, the Chicago & Eastern Illinois owned 
$3,161,433 of the $3,987,383 of the outstanding common stock, 
leaving $825,950 in the hands of the public There was also out- 
standing $1,283,333 of the preferred. 

The consolidated earnings for 1906 amounted to $2,163,680, 
or $6,979 per mile. The total net income for the year amounted 
to $1,076,875. Of this, 67% was consumed by fixed charges, 
leaving a balance of $685,486. This was equivalent to the full 
5% on the preferred and 8.2% on the outstanding common stock. 

The maintenance charges, like those of the other roads be- 
longing to the 'Frisco system, were not overly high. On a freight 
traffic density of 480,122 ton miles, the maintenance of way 
amounted to $730 per mile and maintenance of equipment to $995, 
or a total of $1,725. It was on the basis of these low maintenance 
charges that operating expenses amounted to only 51% of the 
gross receipts from operation. The company states that $42,920 
in additions and improvements was charged to operating ex- 
penses during the year. 

(319) 



320 EVANSVIIXE & TERRE HAUTE 

The full 5% has been paid on the preferred since 1899. From 
1902 to 1905, inclusive, no dividends were paid on the common, 
but 4% was declared in 1906, or one-half of the surplus nomin- 
ally remaining after fixed charges and preferred dividends. 

The preferred stock may be regarded as a fairly solid 5% 
stock, liable, however, to sell somewhat below its actual value on 
account of the prevalent prejudice which exists against Rock 
Island securities. 

The dividend on the preferred does not appear to be overly 
stable and in less prosperous times than in the year of 1906 might 
readily be reduced or passed. 

The margin of safety on the underlying securities is not 
very high, but would probably be regarded as sufficient did the 
road not belong to a system which, apparently, in the minds of 
the public has not yet passed the probationary stage or com- 
pletely demonstrated its ability to withstand a considerable re- 
cession in business. 



GEORGIA SOUTHERN AND FLORIDA 
RAILWAY. 

The Georgia Southern is one of the subsidiary roads of the 
Southern Railway system. It has the same chief officers as the 
latter but is separately operated. The present line includes the 
Atlantic, Valdosta & Western, and in 1906 the operations covered 
395 miles of track. 

The gross earnings were $1,994,946 or $4,924 per mile. Oper- 
ating expenses in 1906 consumed 74% of the gross earnings, 
leaving a total net income of $515,842. Fixed charges consumed 
70% of this amount, leaving a surplus of only $160,159. After 
the payment of the full 5% dividends on the first and second pre- 
ferred stock this left a balance equivalent to about 4% on the 
$2,000,000 of outstanding common stock. 

The traffic density of the road is low, amounting to 219,921 
ton miles per mile of road in 1906. Charges for maintenance of 
way were $669 and for maintenance of equipment $993, which 
may be regarded as ample. 

The full 5% on the first preferred has been paid since 1897 
and the full 5% on the second preferred was paid in 1906. Pre- 
vious to that, from 1900, 4% was paid. It is evident from the 
high percentage of fixed charges on total net income that the 
margin of safety for the preferred stocks is not overly large and 
that they belong still in the class of somewhat speculative invest- 
ments. 

No dividend is being paid on the common and the amount 
earned in 1906 and previous years does not suggest immediate 
prospect for any such payments. 



(821) 

21 



GRAND RAPIDS AND INDIANA RAILWAY. 

The Grand Rapids and Indiana is one of the subsidiary lines 
of the Pennsylvania system, operating a north and south road 
from Richmond, Ind., up through western Michigan towards 
Mackinac. The operations of the company comprise also the 
Cincinnati, Richmond and Fort Wayne, the Muskegon, Grand 
Rapids and Indiana, and the Travers City railroads. The total 
mileage operated in 1906 was 579 miles. 

Of the $5,791,700 of capital stock, the Pennsylvania Com- 
pany owns $2,902,600, or more than a majority of the stock, and 
the directors and officers of the road are principally officials of 
the Pennsylvania Company. 

On January 1st, 1907, the capital account of the road stood 
as follows : 

Common stock. ; $5,791,700 

Funded debt. 9,775,000 

Total capital $15,566,700 

Rentals capit. at 4% 4,250,000 

Approx. gross capit $19,816,700 

Approx. capital, per mile. . $34,229 

. Average miles operated 579 

Net earnings on total capitalization. . . . 6.0% 

Stock on total capitalization 29% 

Fixed Charges on total net income. . . . 76% 

Factor of Safety 24% 

The 6% which the net earnings show on the estimated capi- 
talization are the net earnings in the report. This, however, is 
after rather heavy maintenance, amounting in 1906 to over $2,600 
per mile. These charges on a road with a traffic density of only 

731,000 ton-miles per mile of road, are certainly high, and un- 

(i 
(322) 



GRAND RAPIDS & INDIANA 



323 



doubtedly represent the Pennsylvania policy of large improve- 
ments from earnings. Similarly the percentage of Fixed Charges 
on the Total Net Income would show a much lower figure if 
maintenances expenses had not been so heavily charged. These 
charges for a series of years have compared as follows : 







Maintenance per Mile 




Year 


Traffic Density 




Total 










Way 


Equipment 




1900 


399 ,603 


$1 ,088 


827 


$1,915 


1901 


447 ,682 


1,160 


820 


1,980 


1902 


494 ,786 


1,136 


965 


2,101 


1903 


490 ,883 


1,114 


1,092 


2,206 


1904 


524,244 


1,108 


982 


2,090 


1905 


649,016 


1,054 


1,216 


2,270 


1906 


731 ,341 


1,229 


1,387 


2,616 


Average 


533 ,936 


$1,127 


$1 ,041 


$2,168 



Earnings over a series of years have been as follows : 



Year Ending 
December 31st 


Miles 


Gross Earnings 


Net Earnings 


1897 


586 . 40 
589.82 
583.98 
581.63 
589.95 
589.95 
589.95 
573.39 
581.79 
579.02 


$2,542,086.88 
2,784,844.94 
3,146,165.27 
3,376,182.36 
3,654,725.31 
4,014,775.56 
4,238,885.83 
4,149,727.35 
4,484,193.05 
4,795,103.04 


$655,779.59 


1898 


733,990.43 


1899 


791 ,350.30 


1900 


759,372.25 


1901 


895,388.83 


1902 


957,356.18 


1903 

1904 


817,293.49 
746,226.19 


1905 


871 ,313.73 


1906 


950,970.83 







The gross earnings in 1906 amounted to $8,281 per mile. 
The net income shown after the payment of rentals and charges 
amounted to $179,976 in 1904, $258,587 in 1905, and $286,162 in 
1906. The surplus shown amounted to only 4.3% of the gross 
income in 1904, 5.7% in 1905, and 6% in 1906. The charges for 
conducting transportation and general expenses were high, and 
these, with the high maintenance charges, are responsible for 
the low percentage of surplus shown. 

Since 1900 the stock has paid a 3% dividend, leaving but a 
small annual surplus. 

The balance sheet at the close of 1906 showed an excess of 
about $260,103 of current assets over liabilities. The item of 
cash was $687,244, and the balance to credit of Profit and Loss 
was $448,530. 



324 GRAND RAPIDS & INDIANA 

The road is apparently in good financial position, its mainte- 
nances charges are heavy, and its business has been increasing 
steadily since the reorganization of the company in 1896. The 
gross earnings have increased about 75%, while the net earnings 
have only increased about 33%. This is largely due to the 
Pennsylvania policy of ample maintenance and improvements. 

On a 3% basis, with sound conditions, steadily increasing 
earnings, excellent prospects, and the backing of a powerful 
system like the Pennsylvania, the stock should readily sell for 
$60 to $80 per share. If bought at some such figure as this, an 
investment would probably show a steady increment in value 
from year to year, though in the report of 1906 the company 
complains of the burdens which the State of Michigan imposes 
in heavy taxation and rate laws. 



GRAND TRUNK RAILWAY OF CANADA. 

The Grand Trunk operates a network of roads in eastern 
Canada, extending from Portland, Maine, and Quebec, along the 
St. Lawrence River to Port Huron, and thence to Chicago. 
Through its practical ownership of the Central Vermont, it reaches 
southward from Montreal to New Haven, Conn. Directly in 1906 
the Grand Trunk operated 3,535 miles of road, with 663 miles of 
additional main track. It also owned all the stock of the Grand 
Trunk Western, 336 miles, of the Detroit, Grand Haven & Mil- 
waukee, 189 miles, and of the Toledo, Saginaw & Muskegon, 116 
miles, and of the Central Vermont, 531 miles, and a majority of the 
stock of the Canada Atlantic, 468 miles, bringing the total mileage 
operated and controlled, up to 5,175 miles. It is also financing the 
construction of the Grand Trunk Pacific (which see). 

The Grand Trunk is owned in England, and all its directors 
reside in that country. The present Grand Trunk represents the 
consolidation in 1882 of a company of the same name, with the 
Great Western Company. In 1888, the Northern Railway of 
Canada was absorbed and control of the Canada Atlantic was 
secured in 1904. The road divides the pre-eminence of Canadian 
railways with the Canadian Pacific, in rather sharp rivalry, and 
it has no especial affiliations with any large American system. 

The company's reports are made up semi-annually, and unlike 
the Canadian Pacific, figures as to capital, earnings, etc., are given 
not in Canadian, but in English money; that is, in pounds, shillings 
and pence. This is doubtless for the convenience of the English in- 
vestor. The Grand Trunk is capitalized and conducted along Eng- 
lish lines, that is to say, its capitalization per mile is about three 
times that of other American roads with similar earnings, and as 
its securities and shares command a price in the English market 
much beyond that which they could secure in the American market, 
it has not been deemed worth while to translate the figures into 
American or Canadian money. This translation has laboriously 
been made by Mr. Mundy in his "Earning Power of Railroads," 
where it is to be found. 

(325) 



326 GRAND TRUNK OF CANADA 

Capitalization. 

As of June 30th, 1906, the capital account (in pounds, not dol- 
lars), stood as follows: 

Consolidated stock £22,475,985 

4% guaranteed 8,129,315 

1st preferred stock 3,420,000 

2nd preferred stock . 2,530,000 

3rd preferred stock . 7,168,055 

Total stock. £43,723,355 

Funded debt — 

Debenture stock, 4% 22,477,426 

Loan capital 1,911,000 

Can. Gov. advances 3,111,500 

Total capital £71,223,281 

Total cap. per mile £20,148 

Average miles operated 3,535 

Net earnings on total capital 2.5% 

Stock on total capitalization 60% 

Fixed Charges on Total Net Income. . 65% 

Factor of Safety 35% 

In 1906 the Grand Trunk paid in rentals about £150,000 and 
advanced a little less than £50,000 to make up the deficit for the 
operations on the Canada Atlantic, which, like the rentals, repre- 
sented employment of capital. On the other hand, from securi- 
ties owned, the Grand Trunk received a little over £200,000; that 
is, income from other sources about balanced rentals and deficit 
advances. In the makeup of the table above, therefore, these 
items have been neglected, as they would not affect the result 
and the total capital of the company thus becomes the equivalent 
of the net capitalization on other American roads. 

It will be seen that the capitalization is very high, amount- 
ing to £20,148, or nearly $100,000 per mile. The Grand Trunk 
does not traverse a mountainous section ; a large part of its line 



GRAND TRUNK OF CANADA 327 

is water grade ; it was not built recently, and its gross earnings 
in 1906 were only about $8,700 per mile. This is about the aver- 
age earnings of such roads in the middle West as the North 
Western, the St. Paul and the Burlington, which have been built 
through a country about as thickly settled as Canada and whose 
total capitalization per mile averages around $30,000. The Grand 
Trunk's capitalization of $100,000 per mile compares likewise 
with a gross capitalization for the Canadian Pacific of $35,000 
per mile, with gross earnings of $7,100 per mile. 

This high capitalization is further reflected in the fact that 
the net earnings of 1906 represent only 2,5% on the capital, as 
against 9.4% for the Canadian Pacific, 8.1% for the Pennsylvania, 
8.8% for the Michigan Central, 13% for the Lake Shore, &c. In 
other words, about two-thirds of the capitalization is what is vulgarly 
described in America as "water." Actually, the gross capital- 
ization of the Grand Trunk (about $350,000,000), operating about 
3,500 miles of road, considerably exceeds the gross capitalization 
of the Canadian Pacific, operating over 9,000 miles of road. 

A considerable part of this over-capitalization, however, is- 
represented by stock, upon which no dividends have been paid 
and from the present outlook never will be paid, at any near date. 
The total stock, including the guaranteed 4% stock issued to 
Great Western shareholders at the time of the consolidation, 
represents 60% of the gross capitalization. Nevertheless, even 
with this favorable arrangement, fixed charges, including rentals, 
are high, consuming in 1906, 65% of the total net income, leaving 
only 35% margin of safety for the underlying securities. The 
actual mortgage debt of the road, however, is very small, the 
larger part of the funded debt being represented, after the 
English fashion, by debenture stock, not foreclosable, but on 
which the dividend is cumulative. 



Stability of Earnings. 

The Grand Trunk traverses a country whose population is 
more or less fixed — its earnings are stable and present no great 
variation from year to year. The following table made up by 
the Financial Chronicle from the cumbersome and difficult semi- 



328 



GRAND TRUNK OF CANADA 



annual reports of the road show receipts and disbursements for 
three calendar years : 



Years Ending Dec. 31st 

Gross Earnings 


1905 

$6,018,001 

4,269,153 

$1,748,848 

1,951,232 

155,206 

1,071,144 

11,070 

(4) 275,358 

(5) 170,842 
(5) 126,420 
(2) 143,293 

def. $2,101 


1904 

$5,689,130 

4,100,660 

$1,588,470 

1 1,787,232 

N 155,206 

1,070,505 

4,807 

(4) 255,532 

(5) 170,842 
(5) 126,420 


1903 
$5,916,548 


Transportation Expenses 

Net Earnings . . . . 


4,209,115 

$1,707,433 
1,891,170 


Total Net Income 


Rentals.. 


155,206 


Int. on Bonds & Deb. Stock .... 
Advances to Controlled Roads. 

Do. on 1st Pfd. Stock 

Do. on 2nd Pfd. Stock . . . 
Do. on 3rd Pfd. Stock. . . . 


1,068,690 
13,901 

(4) 214,160 

(5) 170,842 
(5) 126,420 
(2) 143,293 








Balance 


sur. $3,920 


def. $342 



Maintenance Charges. 

The following comparison, taken from Mr. Mundy's "Earn- 
ing Power of Railroads," gives the traffic density and mainte- 
nance charges for the fiscal years of 1905 and 1906: 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1904-5 
1905-6 


731,091 
802,260 


$1,171 
1,257 


$1,081 
1,435 


$2,252 
2,692 



According to Mr. Mundy's computation, maintenance ex- 
penses consumed 25% of the gross income in 1904, nearly 27% 
in 1905, and nearly 30% in 1906. From this it will be seen that, 
revenues remaining about the same, the maintenance expendi- 
tures for 1906 were unusually heavy. Yet on a road of the char- 
acter and traffic density of the Grand Trunk, they were scarcely 
excessive, and probably represented around the normal amount 
necessary for the adequate upkeep of the road. 

Investment Value. 

Save as to its large capitalization, the financial features of 
the. Grand Trunk do not differ greatly from that of the typical 
American railroad. Its average operating charges for three years 
were around 70%, or a very little higher than the average oper- 
ating charge of American roads. Traffic density compared, its 
maintenance charges are at about an average figure. The aver- 
age rate per ton mile received by the Grand Trunk is around 
.67c, very closely the average rate for the United States. 



GRAND TRUNK OF CANADA 329 

From the table of earnings given above, it will be seen that 
through the three years under view the surplus over fixed charges 
was amply sufficient to pay the full 4% dividend on the £8,129,- 
315 of guaranteed stock, and the full 5% on £3,420,000 of first 
preferred. The margin on the second preferred was much nar- 
rower, exhausting practically all the surplus for the calendar 
year of 1904. Through the payment of 2% dividends in 1903 and 
in 1905 on the £7,168,055 of third preference stock, it will be 
seen that there was an actual deficit. 

The full dividend on the guaranteed stock and the first pref- 
erence stock has been paid since 1898, while small dividends were 
paid on the second preference stock from 1898 and the full rates 
since 1901. The third preference stock received one per cent, in 
1902, 2% in 1903, 2% each in 1905 and 1906. 

From all this, it will be seen that the Grand Trunk pursues 
the English policy of paying out its entire surplus in dividends 
each year, while the practice of almost all standard American 
railroads is to turn back somewhere near one-half of the surplus 
into permanent improvements. An American road which pur- 
sued the English policy would not be regarded as sound and its 
stock would tend to sell very much below that of other roads 
paying the same dividend rate. 

Let us bear in mind that the Grand Trunk's maintenance 
charges are in no wise excessive and compare the prices which 
its stocks command in the English market. The lowest price at 
which its 4% guaranteed stock has sold in four years was 95^2 
in 1904 and generally it has sold above par. The lowest price on 
the 5% first preference was 97 in 1904 and it sold as high as 122 
in 1906. The 5% second preference sold as high as 115 in 1906 
and the third preference stock, with an off and on dividend of 
1% or 2%, sold as high as 70. 

With the exception of the last, these are all fixed dividends, 
without prospect of increase. It is safe to say that in the Ameri- 
can market these same securities would have sold at least 20% 
below these figures, on the average, for it would be quite absurd 
to compare a 5% stock, for example, like New York Central, 
carrying control of a rich and enormous system of roads, with 
large equities in subsidiary lines and no fixture in its dividend 
rate, with these preference shares whose rate is fixed and which 
have no equities whatever. 



330 GRAND TRUNK OF CANADA 

It would be curious to determine precisely the cause of this 
wide discrepancy. It is due, doubtless, first of all to the fact, that the 
Grand Trunk is owned in England and that the English investor is 
accustomed to much smaller returns than Americans; second, that 
the road is in the British possessions and not in the United States, 
and third, no doubt, to a belief in a higher standard of hcmesty in 
English and colonial managements. But it is quite certain that 
there are dozens of American roads managed quite as honestly 
as any English line, whose policy as to dividend disbursements 
is very much more conservative, which are devoting enormous 
sums to improvements from their earnings, and are therefore 
steadily increasing in value ; whose credit is steadily increasing 
while that of the typical English railway is sinking to the vanish- 
ing point, and which offer an average of at least 25% higher 
returns to the investor at the selling price of their securities. 

There are very few American lines capitalized on any such 
extravagant basis as that of the Grand Trunk, and the securities 
of these few are not regarded with any degree of favor. 



GRAND TRUNK PACIFIC RAILWAY. 

This quite extraordinary enterprise proposes the construc- 
tion of a complete new transcontinental line from a point near 
Halifax on the Atlantic to a port on the North Pacific. The main 
line will extend from Moncton, New Brunswick, to Quebec and 
from there striking westward in an almost air line to Winnipeg. 
It will lie far to the north of Montreal, Ottawa or Lake Superior, 
and will traverse an almost wholly undeveloped and uninhabited 
country. From Winnipeg the line bears northwesterly to Ed- 
monton and from there by a route not yet determined, will reach 
the Pacific coast at a point called Prince Rupert, where an ex- 
cellent harbor has been secured, several hundred miles to the 
north of Vancouver. Various branches are projected, one of 
them from the wheatfields of the northwest to Fort Churchill on 
Hudson Bay and another to Dawson in the Klondike. 

The eastern division from Moncton to Winnipeg is estimated 
at 1,800 miles, and from Winnipeg to the coast at about 1,700 miles, 
or about 3,500 miles from the Atlantic to the Pacific. 

The incorporated company has an authorized capital of 
$45,000,000, shares of par value of $100 each, of which all the $25,- 
000,000 of common stock will be owned by the Grand Trunk 
Railway. In June, 1906, $25,000,00 sterling debenture stock was 
authorized, of which $15,000,000 is to be used for equipment and 
other purposes. 

The construction bonds of the road are jointly guaranteed 
by the Canadian government and the Grand Trunk Railway, the 
Canadian government guaranteeing 3% first mortgage bonds up 
to 75% of the cost of construction of the western division, this 
cost not to exceed $13,000 per mile for the Prairie section. This 
guarantee is made conditional on the Grand Trunk Railway of 
Canada guaranteeing second mortgage bonds to provide the bal- 
ance of the construction of the western division of the line from 
Winnipeg on. 

In 1906 nearly 1,400 miles of the road was under construction. 

(331) 



332 GRAND TRUNK PACIFIC 

The advantages claimed for this line are that it will shorten by 
1,500 miles the distance from New York to Yokahoma under the 
San Francisco route, and 500 miles under the Canadian Pacific 
or Hill route, with a corresponding shortening of the distance 
from London or English ports. It is being constructed on a 
4-10 of 1% grade and with an average lower gradient and curva- 
ture than any other transcontinental road. 

This construction forms a part of the tremendous railroad 
boom which has been inaugurated in Canada and which will add 
more than 25% to the total mileage of the dominion. It is esti- 
mated that in 1906-7 upwards of 5,000 miles of track were under 
construction in Canada, mainly in the territory lying westward 
from Winnipeg to the base of the Rockies. This rich wheat- 
growing country has enjoyed an extraordinary prosperity, 
coupled with a huge influx of immigrants. It has duplicated the 
famous Dakota boom of the '80s. 

It is to be noted that the entire population of Canada is less 
than 6,000,000 people, less than that of either the states of New 
York or Pennsylvania. And yet its total mileage in 1905 was 
over 20,000 miles, considerably in excess of the combined mileage 
of these two rich states. With the properties now under con- 
struction Canada will have about twice the mileage in proportion 
to its population, as that of the United States. 

So far as the Grand Trunk Pacific is concerned, it parallels, 
or will parallel, especially in western Canada, the Canadian Pa- 
cific, the Canadian Northern and the new Hill line, from Winne- 
peg west. 

It would be quite extraordinary if the phenomenal prosperity 
of western Canada should not undergo a severe set-back such as 
always follows a boom, and if this were to take place the oper- 
ations of the Grand Trunk Pacific might readily impose for a time 
a considerable burden on the parent road. With its present 
heavy capitalization and high proportion of fixed charges to total 
net income, the Grand Trunk is not in a position to meet such a 
burden without considerable impairment of its dividends. 



GREAT NORTHERN RAILWAY. 

The Great Northern is from many points of view the most 
remarkable of the larger railways of the United States, if not of 
the world. It is in a stricter sense than is true of any other rail- 
way the personal creation of one man. It was begun in the West 
when the West was new, and it has led rather than followed the 
westward tide of immigration. It was built through to the Pa- 
cific without a dollar of subsidy, and it reached the coast in the 
panic year of 1893. It continued to earn and pay its 5% divi- 
dends straight through the long depression of 1893-7, even 
though its gross earnings per mile in a single year were cut down 
one-fourth and its net earnings one-third ; and all this while most 
other Pacific roads — the Northern Pacific, the Oregon Naviga- 
tion, the Union Pacific, the Atchison — went into bankruptcy. To 
make the story still more wonderful, all the other Pacific roads, 
its direct rival, the Northern Pacific in particular, received in 
subsidies or land grants far more than enough to have repaid the 
builders every dollar of actual capital they expended. The man- 
agement, the operation, the traffic gathering of the Great North- 
ern have for years been the model and the envy of the other 
railroads of the country. 

The Great Northern in 1906 was operating 6,000 miles of 
railway between St. Paul, Lake Superior and Seattle, with very 
considerable extensions in progress, with lines of steamships on 
the Great Lakes, and across the Pacific. It had vast ore properties 
in northern Minnesota about Lake Superior which it has since 
leased to the United States Steel Corporation, insuring the 
Great Northern, in freight rates, an average gross income as a mini- 
mum of over $8,000,000 per year for at least eleven years, and 
probably much beyond that. It had in addition control of and a 
half interest in the surplus earnings of the Chicago, Burlington 
and Quincy, over and above the interest on the bonds issued in 
payment for the road, estimated at from two to four million dol- 
lars for 1906, to say nothing of the market worth of this huge 

(333) 



334 GREAT NORTHERN 

equity. Finally, its management was practically identical with 
that of the Northern Pacific, its chief rival, affording to the 
Great Northern a practical monopoly of transportation facilities 
over a vast territory. 

As evidence of the financial strength of the company, its 
$150,000,000 of stock was selling throughout the fiscal year of 
1906 at above $300 per share or at a premium of over $300,000,000 
on its face value. And in the fall of 1906 the road issued to its 
shareholders, trust certificates covering the income from the ore 
lands lease, to a face value of the entire capital stock of the com- 
pany, and selling in the open market for around $85 per $100 
share. 

History. 

The Great Northern was chartered in 1889, directly as the 
successor of the Minneapolis and St. Cloud Railway, but practi- 
cally for the purpose of taking over the St. Paul, Minneapolis and 
Manitoba system, which was leased to the Great Northern for 
999 years in 1890. The "Manitoba" was in turn an outgrowth of 
the St. Paul and Pacific, which had been incorporated as the 
Minnesota and Pacific Railroad in 1857 to build a railway from 
St. Paul in the direction of the Pacific coast. In 1860 the road 
failed to pay its interest on advances from the state of Minnesota 
and it was for a time operated as a state road, being then turned 
over to the St. Paul and Pacific, which collapsed in 1873. Soon 
after, Mr. Hill and his associates obtained the control of the 
road, after a long fight in the courts, and in 1879, organized the 
St. Paul, Minneapolis and Manitoba. Soon after came the 
famous boom of the early eighties and the earnings of the com- 
pany were so enormous that by 1883 the shareholders were 
offered $10,000,000 of consolidated bonds at the rate of 10% of 
their par value to the amount of one-half of the holdings, which 
was practically equivalent to a 40% dividend ; and this was over 
and above an 8% regular dividend in the same year. With the 
formation of the Great Northern Railway, the line to the Pa- 
cific was pushed rapidly and completed in 1893. But so con- 
servatively had the road been capitalized, especially as regards the 
issue of bonds, that despite the drastic depression which ensued, 
the road was not only able to keep out of the hands of receivers 
but to continue its regular 5% dividends. 

Various lines, like the Eastern Railroad of Minnesota, the 
Seattle and Montana, etc., for the most part constructed for the 



GREAT NORTHERN 335 

Great Northern by subsidiary companies, were added to the main 
system. The Spokane Falls and Northern system is still operated 
independently, like the Minneapolis Union Railroad, but they are 
entirely owned by the Great Northern. 

In 1901 control of the Burlington was purchased, which 
practically added in 1906, nearly nine thousand miles to the 
system. At about the same time as the Burlington purchase, 
Hill interests entered the directorate of the Northern Pacific and 
undertook the management of that road. The proposed merger 
of the three roads through the formation of the Northern Securi- 
ties Company as a holding organization of the controlling shares 
of their stocks, was undertaken in 1902, but soon afterwards dis- 
solved by the courts, after a memorable fight, on the ground that 
the purpose of the company was in effect the merger of com- 
peting lines of railroad. Mr. Hill retired from the Northern 
Pacific directorate when his son was made vice-president of the 
company, but it is Mr. Hill who dominates the policy of the 
road. 

Ownership. 

The Great Northern comes very near to being Mr. Hill's 
private possession, if not in point of actual ownership, at least as 
regards its actual management. The directorate includes Mr. 
Hill himself, his son, L,. W. Hill, president; R. I. Far- 
rington, second vice-president; Edward Sawyer, treasurer; and 
Frank E. Ward, general manager; these five form a majority of 
the board. The other directors are: Frederick Weyerhaeuser, at 
the head of the Weyerhaeuser lumber interests and long identi- 
fied with the road, also a director in the Chicago Great Western; 
Henry W. Cannon, formerly president, now chairman of the 
board of the Chase National Bank, president of the Pacific Coast 
Company, controlling a large line of Pacific coast steamships ; 
Samuel N. Thorne, a director of the Central Trust Company of 
New York, and in other enterprises; and William B. Dean, of St. 
Paul. The number of stockholders of the road is not reported, but 
it is not large. The Hill lines work in close association with the 
Morgan interests, which are prominent in the directorate of the 
Northern Pacific, and Mr. Hill has been a director in the Erie 
road, also largely dominated by Morgan interests. His resig- 
nation in 1906 was not accepted. Through the lease of its ore 
lands the Great Northern has recently come into close associ^ 



336 GREAT NORTHERN 

ation with the United States Steel Corporation, in which Morgan 
interests are likewise influential. 

By a curious coincidence Mr. Hill was born in Canada and 
became head of one of the greatest railroad systems in the 
United States, just as both Sir William Van Home and Sir 
Thomas Shaughnessy were born in Illinois and became heads of 
the greatest railroad system in Canada. Mr. Hill had accumu- 
lated a considerable fortune in the boating and transportation 
interests about St. Paul before entering railroading, in this re- 
gard following the career of Commodore Vanderbilt. He was 
first local agent of the St. Paul and Pacific Railway at St. Paul, 
and in 1879 was made general manager, and in 1881 vice-presi- 
dent of the newly organized St. Paul, Minneapolis and Manitoba. 
In 1883 he was made president of that road and has since con- 
tinued. He developed a marvellous aptitude for railroad man- 
agement, and was the pioneer in the policy of full cars and heavy 
trainloads, which has subsequently worked so enormous a re- 
duction in the transportation costs of the country. It is worthy 
of note that when it was proposed to push the railroad through 
to the Pacific without subsidies or land grants, through a 
wholly unsettled country and along the extreme northern line of 
the United States the enterprise was popularly known as "Hill's 
Folly." So did his genius for transportation triumph however, 
that when the Northern Pacific and other roads went into bank- 
ruptcy, Mr. Hill was able to keep his road on its feet, sheerly 
through its larger earnings per train mile, and its low fixed 
charges. His genius is shown equally in matters of railroad 
finance. It was his foresight and sagacity which bought up the 
rich iron deposits of northeastern Minnesota, today of actual or 
potential value sufficient to retire the entire outstanding capital- 
ization of the Great Northern system and leave a huge surplus 
besides. Similarly, his remarkable judgment was shown in the 
purchase of the Burlington road when $200 a share was paid for 
its stock. He is almost as well known in Europe as in America 
and it is notable that the financing of the Hill roads has never 
been with the aid of underwriting syndicates. 

Capitalization. 

It is quite impossible from the Great Northern's reports to 
make up an estimate of its capitalization on the same basis as 
with other roads. The reports are not designed to give a great 



GREAT NORTHERN 337 

deal of information, and were it not for the magnificent record 
which the management has made, they would produce a very 
unfavorable impression. 

On June 30th, 1906, the nominal capitalization of the system 
was as follows : 

Capital stock $149,546,050 

Funded debt • 100,227,939 

St. Paul, Minn. & Man 347,000 

Total capital $250,120,989 

Approx. gross capit. per mile $42,362 

Average miles operated 5,906 

Net earnings on gross capitalization. . 10.1% 

Stock on total capitalization 60% 

Fixed Charges on Total Net Income. .. 26% 

Factor of Safety 74% 

The showing given above is the gross capitalization ; the 
actual capitalization was considerably less. For example, some 
years ago the Great Northern transferred to the Lake Superior 
Company Ltd., all its ore lands, its interest in the Great Northern 
Express Company and some miscellaneous holdings. It was the 
ore lands held by this latter company which formed the basis 
of the issue to Great Northern stockholders in 1906 of ore 
certificates to a par value of $150,000,000. Of all this, or of the 
earnings of the company, or even that such a company exists, 
the Great Northern's report of 1906 did not give the remotest 
hint. 

Taking the ore certificates alone, these sold at from $85 to 
$50 per $100 share in 1906-7. Averaging these at $75 per share, 
this represented the cash equivalent of three-quarters of all the 
Great Northern's stock and nearly one-half of the gross capitali- 
zation of the road. 

Since this distribution, however, which was virtually equiva- 
lent to a stock dividend of 75% and more, the Great Northern's 
capitalization must stand on its own legs ; that is, the purchaser 
of Great Northern stock now has no interest in the ore properties 
beyond the coal traffic which they will furnish to the railroad 
proper. 

22 



M GREAT NORTHERN 

: Probably the remaining holdings of the Lake Superior Corn- 
jpany Ltd., and the other outside holdings of the Great Northern 
would not very greatly reduce its capital, so that the estimate 
of $250,000,000 is somewhere near the actual capitalization of 
the railway, that is, what has been spoken of in considering other 
companies as the net capitalization. 

Even on this basis; it is evident from the showing of the 
net earnings that the Great Northern's capitalization is low. It 
is true that the net earnings shown are on a basis of rather 
low maintenance charges, so that in strict comparison with other 
roads, the 10.1% shown in 1906 would be slightly reduced. As 
it is, it stands against 8% for the Union Pacific, 9.6% for the 
Northern Pacific, 9^4% for the Canadian Pacific, 5.9% for the 
Atchison, 6.6% for the Southern Pacific. 

Again, the estimate of a capitalization of $42,362 per mile 
for the Great Northern stands against similar estimates of $59,- 
512 for the Northern Pacific, $58,887 for the Atchison, $28,613 for 
the Canadian Pacific, $64,426 for the Southern Pacific, and an 
actual net capitalization of the Union Pacific of about $50,000 
(nominal $73,992). 

It will be seen that: the amount of bonds of the Great North- 
ern is relatively low, amounting to an average of only about 
$17,000 per mile, the stock representing 60% of the gross capi- 
talization and fixed charges consuming only 26% of the total net 
income. Only a few of the strongest roads in the country, like 
the Lackawanna, are able to make any such showing as this. It 
is evident enough that earning as it does, around 13% a year on 
its 150 millions of stock, the security of the underlying bonds of 
the Great Northern would never be questioned. The nominal 
Factor of Safety is 74% ; actually it is nearer 100%. 

Equities Owned. 

-'■ ;r: As to the value of the Lake Superior Company, Ltd., all 
of which is owned by the Great Northern, no information is fur- 
nished by the reports and none is forthcoming. Now that the ore 

• holdings have been transferred to a separate set of trustees, the 
chief element of value in this asset has been eliminated. Though 
it may still be considerable, it does not compare with the Great 
Northern's other equity in the Burlington. 

. For a number of years the Burlington has been charging im- 
provements to operating expenses, the amount of surcharge in 



GREAT NORTHERN 339 

1906 probably being in the neighborhood of eight or nine million 
dollars. Estimating that the half of this would be equivalent to 
similar expenditures on other lines in the same territory, there would 
still remain a concealed surplus of at least four million dollars, 
half of which might have been claimed by the Great Northern. 
It is obvious, therefore, that the Great Northern has here an 
equity worth perhaps twenty to thirty millions and that in time of 
need it could, since its control of the Burlington is complete, add 
from one to two million dollars annually to its net income, at 
will. 

The Great Northern has no such large land holdings as, for 
example, the Canadian Pacific and others but it has several 
hundred thousand acres from old land grants still remaining un- 
sold and its cash receipts from this department in 1906 were 
$600,000. 

The Ore Lands Contract. 

In 1906 the Great Northern, through its representatives, 
contracted with the United States Steel Corporation for ex- 
clusive rights to mine its great bodies of ore in northeastern 
Minnesota, on a royalty basis. The price to be paid was $1.65 per 
ton, delivered at the upper Lake docks, with an increase of 3.4 
cents per ton through each succeeding year. The minimum agreed 
to be mined is 750,000 tons for the year of 1907, and increasing by 
an equal amount each year until the output reaches 8,250,000 tons per 
annum, continuing thereafter, on this basis. The maximum out- 
put provided for in the contract would be reached in the year 
1917. In this year the Steel Corporation will be paying $1.99 per 
ton for the ore, involving a total royalty of $16,500,000 per year. 
Needless to say, these are the minimum figures and it is expected 
that the actual output will be considerably exceeded. The contract 
is to run indefinitely, unless terminated, at the option of the Steel 
Corporation Jan. 1, 1915, two years notice to be given. 

It is computed that there are upwards of 400,000,000 tons 
of iron ore covered by this contract, more optimistic figures 
being much higher even than this. It is easy to see, therefore, 
that unless the minimum out-take provided for be enormously 
exceeded, the life of these mines would extend over a long period. 
Subsequent to this contract, these ore bodies were transferred 
from the holding company, the Lake Superior Co., Ltd., to three 
trustees, consisting of President Hill and his two sons, James N. 



340 



GREAT NORTHERN 



and Walter j. Hill, to be held by them in trust and for the benefit 
of the shareholders of the Great Northern Railway. To the 
shareholders were issued Ore Certificates, so called, to the par 
value of their holdings of Great Northern stock, so that, sup- 
posing these certificates were worth par, this was equivalent to 
a 100% stock dividend. 

But aside from the proceeds from the ore certificates, Great 
Northern proper will derive a considerable direct benefit from 
the haul of the ore from the mine mouth to the docks. At the 
present time it is estimated that this traffic amounts to in the 
neighborhood of five or six million tons annually; under terms 
of contract it will be seven and one-half millions the first year, 
with the addition of as much more in each succeeding year, for 
eleven years. This in itself will go far towards swelling the 
profits of the company. 

Increase of Capitalization. 

Since 1900, the Great Northern has added about $55,000,000 
to its gross capitalization, almost the entire amount of the in- 
crease being in stock. Less than $4,000,000 has been added to 
its already very low bonded debt. The total increase amounted 
to a little over a quarter of the gross capitalization, while gross 
earnings in the same period almost doubled. The various items 
compare as follows : 



Year 


Common Stock 


Funded Debt 


Total 


Gross Earnings 


1900 
1906 


$ 98,413,500 
149,546,050 


$ 96,753,697 
100,227,939 


$247,959,550 
249,773,983 


$28,910,789 
51,276,280 



Increase over six years : Total capital, 28% ; gross earnings, 
77%. 

At the close of 1906, the Great Northern offered to its share- 
holders $60,000,000 of new stock at par, which meant to the 
extent of 40% of their holdings ; payments of the same to be 
extended over a period of two years. 

Character of Traffic. 

The Great Northern reports have never been lavish in the 
amount of information they afford and among other items usually 
reported, it does not give the character of its tonnage. When 



GREAT NORTHERN 



341 



the road was completed to the Pacific an enormous lumber trade 
was developed and in order to fill the westbound cars, the cotton 
trade and other merchandizing with Asian ports was energetically 
stimulated. In 1900 a steamship line to the Orient was organized 
for the purpose of still farther developing this trade. The ore 
carriage of the Great Northern to Lake Superior is also very 
heavy, although the haulage is short. In other words, in addition 
to the grain traffic, which would otherwise be the mainstay of 
the Great Northern, a wide variety of other tonnage has been 
gathered with quite extraordinary assiduity, so that despite its 
peculiar situation, the traffic of the Great Northern is probably 
as widely distributed as that of any railroad in the country. So 
important indeed has this ownership of ore lands become that a 
series of bad years such as the Great Northern's territory suf- 
fered after the collapse of the boom of the '80's might come now 
without affecting in any similar way the prosperity of the road. 

Stability of Earnings. 

From the bedrock year of 1896, the mileage and earnings of 
the system, including the Montana Central, the Willmar and 
Sioux Falls, and the Duluth, Watertown and Pacific, this being 
known as the railway system proper, but not including the 
Spokane Falls and Northern, the Minneapolis Union Railway, 
the Minneapolis Western Railway, and the Duluth Terminal, 
operated separately, have been as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896-7 


4,415 


$19,436,061 


$4,402 


1897-8 


4,466 


22,577,544 


5,055 


1898-9 


4,786 


25,017,904 


5,227 


1899-0 


5,076 


28,910,789 


5,695 


1900-1 


5,202 


28,350,690 


5,450 


1901-2 


5,249 


36,032,256 


6,864 


1902-3 


5,490 


40,785,647 


7,429 


1903-4 


5,623 


40,057,353 


7,124 


1904-5 


5,723 


43,526,088 


7,605 


1905-6 


5,906 


51,276,280 


8,681 



It will be seen that with an increase of less than 40% in 
mileage, the earnings of the system have risen from $19,000,000 
in 1897, to over $51,000,000 in 1906. In other words the gross 
earnings per mile within this period have more than doubled. 
The gross earnings of the four roads noted above as operated 
separately, swelled the earnings of the Great Northern lines to 
$53,000,000 in 1906. 



342 GREAT NORTHERN 

Mr. Hill has pointed out that this enormous increase in 
earnings on the Great Northern has not been derived as on so 
many eastern roads, as for example the Pennsylvania, the Balti- 
more and Ohio, etc., from a heavy increase of freight rates, but on 
the contrary in the face of a heavy reduction. The report for 
1905 prints a very interesting table showing the reduction in 
the average rate per ton-mile for a quarter of a century. It was 
as follows: 

1881 2.88c. 

1890 1.25c. 

1900 89c. 

1905. ...... 79c. 

In the meantime the number of revenue tons hauled one 
mile had risen from 93,000,000 to 4,170,000,000; and the report 
points out that had the tonnage of 1905 been carried at the rates 
of 1881, the freight revenue received would have amounted to 
$120,000,000 as against $33,000,000 actual. In other words the 
freight rates had been cut down more than 70% within 25 years ; 
and Mr. Hill's policy has been to promote as steady a reduction 
in rates as the business conditions would permit. The intent 
of the new low grade road from Spokane Falls to Portland is 
to provide the Hill lines with a western outlet through which 
freight can be carried at a minimum charge; and as the part of 
the Great Northern from Spokane to the coast was that involving 
the heaviest grades, and the greatest expense, the new line is 
expected to make the road practically impregnable in its ability 
to make low through transcontinental rates. 

Maintenance. 

One very remarkable achievement of the Great Northern has 
been an "operating ratio" of 50%, in the face of a general average 
of about 69% for the whole country, and a matter of 70% to 
75% on many prosperous roads. This extraordinary low ratio 
of running expenses to earnings has been skeptically looked upon 
by many as "mere bookkeeping." It is forgotten that most rail- 
way statistics outside of gross earnings and actual interest and 
rental charges are mere bookkeeping, and that the Great Northern 
is not alone in charging only its actual necessities under the item 
of maintenance, and then devoting large sums from surplus to 
improvements. But it is partly in this way that the operating 



GREAT NORTHERN 



343 



ratio of the Great Northern has been kept down to its remarkable 
figure. The maintenance charges for the road for a period of 
six years have been as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 








1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


477 ,076 
607 ,776 
656 ,982 
596 ,088 
728 ,666 
835 ,342 


$846 
985 
960 
904 
973 
1,092 


$452 
519 
566 
559 
655 
816 

$594 


$1 ,298 
1,504 
1,526 
1,463 
1,628 
1,308 


Average 


650 ,321 


$960 


$1 ,554 


Can. Pac 

Nor. Pac 

Union Pac 

Atch 


458 ,589 
729,102 
739,206 
577 ,005 
594 ,848 
580 ,024 


850 
1,300 
1,173 
1,123 
1,446 
1,104 


1,002 
791 
1,049 
1,113 
1,246 
1,032 


1,852 
2,091 
2,222 
2,236 


Sou. Pac 

Burlington 


2,692 
2,136 



It is to be remembered that the Great Northern's passenger 
service contributes less than 20% to the gross earnings, though 
the Northern Pacific, for example, was a little higher in this 
regard. Bearing this in mind, it will be seen that with a traffic 
density considerably higher than that of the Atchison, the South- 
ern Pacific or the Burlington, the Great Northern expended for 
maintenance on the average from $600 to $1,000 per mile less. 
On nearly 6,000 miles of railroad, this would have meant a differ- 
ence in the surplus shown by the Great Northern of from three 
and a half to six million dollars per year, on the average; or 
conversely, had the Atchison and other roads kept their main- 
tenance charges down in the same way their surpluses would 
have been over $5,000,000 per year larger for the Atchison, 
$9,000,000 for the Southern Pacific and perhaps $5,000,000 for the 
Burlington. 

The Northern Pacific traffic density was somewhat higher 
than that of the Great Northern, but its average maintenance 
charges were also $500 per mile higher. Even the Canadian 
Pacific, with a traffic density one-third less, stands on the 
average at $300 per mile more than the Great Northern, a 
difference which would have swelled its surplus by two and a 
half million dollars per year. 

The year 1906 saw no change in this quite extraordinary 
difference in maintenance charges between the Great Northern 



344 



GREAT NORTHERN 



and all its rivals, and the following table is of quite striking 
interest : 





Traffic Density 


Way 


Equipment 


Total 


Northern Pacific 

Atchison 


971 ,344 
693 ,873 
713,568 
678 ,554 
990,815 
835 ,342 


$1 ,387 
1,479 
1 ,271 
1,775 
1,519 
1,092 


$1 ,098 
1,271 
1,533 
1,554 
1,222 
816 


$2 ,485 
2,750 


Burlington 


2,804 


Southern Pacific 

Union Pacific 

Great Northern 


3,329 
2,741 
1,908 



It will be seen from the above, that the nominal expenditures 
of the Great Northern, on a much higher traffic density, were 
$850 per mile less than the Atchison, and $1,400 per mile less than 
the Southern Pacific. In other words, had the Great Northern's 
maintenance charges been on an Atchison basis, its nominal 
surplus would have been $5,000,000 less than it was, and on a 
Southern Pacific basis $8,000,000 less; or on a Great Northern 
basis the Atchison surplus would have been $6,000,000 more than 
it was for 1906, and the Southern Pacific's surplus would have 
been $10,000,000 or $12,000,000 more. 

The character of the Pacific roads is, broadly speaking, much 
the same. At least such difference as exists would in no wise 
account for this wide disparity of maintenance charges. 

This disparity helps to account for the fact that the Great 
Northern showed a 50% "operating ratio", while the Atchison's 
was 62% and the Southern Pacific's, 64%. 

Improvements from Earnings. 

This economy in maintenance charges, however, has been to 
a large extent made up by very heavy appropriations from earn- 
ings for permanent improvements and renewals. The appro- 
priations from 1898 compare as follows : 

1897-8 $2,250,000 

1898-9 1,800,000 

1899-0 1,800,000 

1901-2 2,000,000 

1902-3 3,000,000 

1903-4 2,000,000 

1904-5 3,000,000 

1905-6 5,130,910 



Total $20,980,910 



GREAT NORTHERN 



345 



It will be seen that in 1906 the special appropriations added 
about 50% to the actual expenditures for maintenance, which 
totalled a little over $10,000,000 for the year. 

But the Great Northern has not been extraordinary. Within 
the same period the Northern Pacific, with an average expendi- 
ture of maintenance nearly one third higher than the Great North- 
ern has set aside $26,081,000 for improvements; the Atchison 
from 1901, $15,859,000; the Union Pacific, $19,885,775. 

It will be seen that the Great Northern's appropriations ob 
surplus have not been much larger than those of other roads of 
a similar type, so that the difference of its maintenance charges 
from other roads still remains and would operate considerably 
to reduce the large nominal surplus which it has shown within 
recent years. 

Surplus Earnings. 

It should be understood that the items of surplus shown be- 
low are not those given in the Great Northern reports, since in 
the make-up of the road's income account, the total income shown, 
i. e., the surplus, is after charging off special appropriations for 
renewals and improvements instead of before as is the usual 
practice in railroad reports. So, for example, in the report for 
1906, the surplus shown before payments of dividends is $5,- 
130,910 less than the amount shown in the table below, and as 
much less in each of the previous years as the appropriations 
given in the table above. 

The comparison on the uniform basis adopted in this book, 
is as follows : 



Year 


Surplus 

■smt 


Per cent. 

Earned on 

Stock 


*"; Dividend] 
Paid on 
Stock 


Average 
Price 


1900-1 

1901-2 


$9,388,982 
14,526,521 
15,496,022 
14,171,678 
16,587,643 
19,984,915 


7.6 
11.8 
12.5 
11.4 
13.3 
13.3 


7% 
7 
7 
7 

7 
7 


192 

188 


1902-3 

1903-4 

1904-5 

1905-6 


189 
187 
291 
312 



Dividend Record. 

Nominally the dividends shown since the organization of 
the St. Paul, Minneapolis and Manitoba have been as follows: 



346 GREAT NORTHERN 

Year. Manitoba. 

1881 3 

1882 9 

1883 8 

1884 7y 2 

1885-1906 6 

Gt. Nor. 

1890 1 

1891 Ay A 

1892-6..... 5 

1897 sy 2 

1898 6y 4 

1899-1907 7 

As a matter of fact, the dividends shown above reflect but 
the minor part of the actual returns received by Great Northern 
stockholders. The Great Northern is one of the roads which 
have from time to time given its shareholders very valuable 
rights. Mention has already been made, for example, of the 
offering of bonds in 1883 which amounted to a 40% dividend. 
The Great Northern was organized in 1889, and in the seventeen 
intervening years the company has increased its capital stock 
from twenty million dollars to one hundred and fifty millions, 
of which all but twenty-five million dollars has been sold to the 
stockholders at par or less. 

The amount of these stock offerings, the percentage to 
which each subscriber might add to his holdings, the market 
price at the time of the offerings, and the market value of the 
rights have been as follows: 



Year 


Amount 


Per Cent. 


Market 
Price 


Value of J 
Rights 


1905 


$25,000,000 

25,000,000 

9,000,000 

15,000,000 

25,000,000 

5,000,000 


20 
25 
10 
20 
100 
25 


• m 
320 : 
[200 : 

170| 
190 
176 
120 


38 


1901 


24 


1900 


60 


1899 


14 


1898 


*108 


1893 


5 







*Stock dividend included. 

In 1898 the stock of the Seattle & Montana Railway, a sub- 
sidiary company, was distributed to the shareholders to the ex- 



GREAT NORTHERN 347 

tent of 50% of their holdings and this stock was then exchanged 
to 80% of its par value for Great Northern stock. The latter was 
selling then at the lowest at $125 per share. This was equivalent 
to a cash dividend of 50%, which added to $58 cash value of the 
subscription rights for that year, made the total extra divi- 
dends for the year amount to at least $108. 

Erom all this it will be seen that had the original shareholder 
in the Great Northern from 1889 systematically sold his rights, 
he would have received in addition to 86% in dividends, at the 
least 215% in cash value of his rights. That is, the value of the 
rights averaged very nearly 12.5% a year. 

Had the rights not been sold, but taken up by the share- 
holders themselves, it has been estimated that the original share- 
holder of 1889 who still held in 1906 all the stock he had sub- 
scribed for would have had at 1906 prices, a profit of about 900%. 

At the close of 1906 the shareholders were offered new stock 
to the extent of 40% of their holdings at par. The stock was 
then selling, ex-ore certificates, at around $230 per share, at 
which figure the rights were worth around $40. Owing to the 
litigation, instigated by the State of Minnesota, the share issue 
was held over and in the meantime the stock slumped violently 
to around $126 per share, at which figure the cash value of the 
rights was worth less than a quarter as much. 

Very plainly the Great Northern road has been managed for 
the benefit of all its shareholders and not simply that of a few in- 
siders. Probably it is this fact, which, in connection with the 
great value of its leases, has given so high a premium to Great 
Northern stock. 

The Balance Sheet. 

As further evidencing the financial strength of the road, 
the balance sheet of June 30, 1906, showed: 

Current assets of $23,266,493 

Current liabilities 6,690,100 

Deferred liabilities 1,082,519— 7,772,619 

Leaving a working balance of $15,493,874 

There was an aggregate item of cash on hand of $13,783,808. 



348 GREAT NORTHERN 

It is to be noted that among the items of "Contingent 
Liabilities, renewal funds, etc.," there were surplus funds of 
proprietory companies deposited with the Great Northern Rail- 
way Company of $9,172,469. Probably a considerable portion 
of this represents the accumulated surplus of the Lake Superior 
Company. 

The total credit balance to Profit and Loss of the Great 
Northern and its proprietary companies in 1906 was $27,603,558. 

Land Department. 

The land grants inherited by the company from its pre- 
decessors amounted to a net total of somewhat over 800,000 
acres, which further adjustments with the government will re- 
duce to less than 200,000 acres, remaining unsold. During the 
year of 1906, 3,270 acres were sold at an average of $9.81 per 
acre. 

On this basis the remainder of the Great Northern's land 
grants might be estimated as worth between one and two million 
dollars. 

Extensions. 

Jointly with the Northern Pacific, the Great Northern is 
building a new line from Portland and Vancouver into Spokane 
and Eastern Washington. It is quite characteristic of the Great 
Northern's reports that neither that for 1905 nor for 1906 contains 
a line of mention of this important project. It is referred to 
briefly in the reports of the Northern Pacific. The line is known 
as the Portland & Seattle Railway Company and follows the 
north bank of the Columbia River and will be very nearly a 
water grade line. It is one of the most expensive pieces of first 
construction in western railroading and is estimated to cost 
upwards of $30,000,000; that is, $60,000 to $70,000 per mile for 
423 miles of line. 

The importance of this new line lies in the fact that it will 
provide the two sponsor roads with transcontinental lines cross- 
ing but a single mountain range; that is to say, it will cut out 
the crossing of the Cascades in Washington. No other trans- 
continental line will have less than three range crossings. It 
is a part of the scheme outlined by President Hill in a speech 
sometime ago in Spokane, wherein he said that by the time 
the Panama Canal was completed, his lines would have a freight 



GREAT NORTHERN 349 

way across the continent, carrying traffic so cheaply that lily 
pads would grow in the canal. 

This line is of especial interest, too, in considering the in- 
vasion of the Great Northern-Northern Pacific territory by the 
new extension of the St. Paul to the coast. Against the single 
range which the Hill lines will then cross, the St. Paul will cross 
four. 

In addition to all this, President Hill has outlined an am- 
bitious project for the extension of the Great Northern into Canada, 
amounting practically to the construction of a new trunk line 
from Winnipeg west, probably to the base of the Rocky Moun- 
tains and lying between the Canadian Pacific and Canadian 
Northern lines. This is the same great territory that will be 
crossed by the new Grand Trunk Pacific, so that when all the 
new construction under way or projected for the Canadian North- 
west is completed, it will have four great trunk lines instead of 
one, as at present. 

It is fairly clear that President Hill means to make these 
extensions tributary to the main system, and doubtless to his 
steamship lines on the Great Lakes. This Canadian territory 
has been enjoying a tremendous boom within the past few years, 
in almost every respect paralleling the famous Dakota boom of 
the '80s. Millions of home seekers have gone into this far 
northern country to take up the rich wheat fields it contains, 
and it is estimated that to keep up with, and further to stimulate, 
this immense tide of immigration, some 5,000 miles of railway 
are planned and building. In the natural business cycle it seems 
almost certain that a reaction will set in, but so far as the Great 
Northern is concerned, it is to be noted first of all that Presi- 
dent Hill has already built one road, a transcontinental road at 
that, and carried it successfully through the heaviest depression 
this country has known since 73-77; further, that this reaction 
may come before the lines are completed and that they may 
not be built as rapidly as contemplated. 

It is significant of the Hill policy that all these Great North- 
ern extensions are being made without a dollar of subsidy or a 
dollar of bonds ; that is, wholly through stock issues. 

Beyond all this, the Great Northern has a line which is 
pushing through Western Nebraska from Sioux City with nomi- 
nal objective in Denver, thus invading distinctively Union Pacific 



350 GREAT NORTHERN 

territory. Other smaller constructions are constantly adding to 
its mileage. 

Investment Value. 

It is obvious from what has preceded that Great Northern 
is a stock which has offered quite extraordinary inducements to 
investors who were content to hold it for a period of years. On 
the basis of its nominal dividend, the yield, on a price of $300 
per share, is only a little over 2%. If, however, the investor were 
to include the cash value of rights, he will find that from 1899, 
when the Great Northern was put on a 7% basis, to 1906, the 
rights amounted to more than 11% per annum to say nothing of 
the 75% dividend in ore certificates, and to a great deal more 
than that to the shareholder who exercised his subscription 
rights. 

The actual average return for a period of seven years has 
been around 18%, and including the cash value of their ore cer- 
tificates of 1906, around 28%. This, on a basis of $300 per share 
would mean a yield of from 6 to 9% on the investment. 

If, through the building of the new Spokane Falls-Portland 
line, the Great Northern's extensions in Canada and the lease 
of the ore lands, the average could be maintained, the Great 
Northern would more likely average above $300 per share 
through this period than below it. Mr. Hill takes an intense pride 
in the property of his road, and justly; his fortune is made, and 
there is no reason to suppose that his stockholders will fare any 
worse in the future than in the past. 

What then is to be said of the heavy slump in Great Northern 
at the beginning of 1907, when in the stock panic of March 14, 
it touched as low as $126 per share, which, with prospective 
rights worth about $8 per share, was equivalent to around $120. 
This was by far the lowest point which Great Northern has 
touched in many years. Combining this price, rights included, 
with the low figures for the ore certificates of $50, this was 
equivalent to a valuation of $176 per share, as compared with the 
high figures of $348 reached in 1906. This was a drop of nearly 
one-half, a tremendous fall. No other solid stocks, save the North- 
ern Pacific showed anything like such a decline. It is well known 
that this heavy fall was a surprise even to those supposed to be in 
close association with the Great Northern management, for it is 
equally well known that they had advised the purchase of Great 
Northern at considerably above $300 per share. 



GREAT NORTHERN 351 

Among other explanations offered, was the heavy selling 
of the stock by the Union Pacific, which disposed of the large 
part of its interests acquired through the dissolution of the 
Northern Securities Company ; the extension of the St. Paul to 
the Pacific, invading Hill territory ; and the rather hostile attitude 
assumed by the Minnesota authorities toward the proposed issue 
of new securities. 

It is true that, as already noted, the high price of Great 
Northern has been due to the large profits accruing periodically 
from the substantial "rights" offered to stockholders, and it was 
assumed that official or legislative action might seriously inter- 
fere with this very agreeable process. The decline was further 
helped by the suit brought by the State of Minnesota for the 
abrogation of the charter of the St. Paul, Minneapolis and Mani- 
toba, the chief constituent of the Great Northern system, this 
action being taken on the ground that in its stock issues the 
parent road had exceeded the terms of its charter. 

There is no doubt that the generally hostile spirit towards 
the railways, which reached a somewhat acute stage in the 
winter of 1906-7, would, if continued, tend materially to depress 
railway values, and especially of those roads lying in states 
where opposition to the railroads is a popular political card. For 
this reason, it is very difficult to estimate the future course of 
the Great Northern securities, but it is to be noted that there 
are other methods of "belling the cat" than the especial form of 
stock issues to shareholders at much below the market value. 
Should, therefore, the territory covered by the Great Northern 
experience no heavy depression, it may be assumed that the 
liberal policy of the company towards its shareholders will be 
continued in one form or another, and even if it were not, should 
earnings continue as heavy as in the past 10 years, they would 
be adding constantly to the value of the property, whether dis- 
tributed in dividends or put back into the road. 

In any event, Great Northern may be looked upon as per- 
haps as solid a seven per cent, security as is to be found in the 
country, and with its splendid management, it would tend to sell 
certainly as high as any similar security. It should be worth 
well around $175 per share without further prospects, and if 
purchased at any considerable recession from this price, would 
certainly be an attractive issue, liable to show large profits if 
put away and held. 



352 GREAT NORTHERN 

Ore Certificates. 

As to the value of the ore certificates, it seems to be gener- 
ally assumed that they will be able to pay a 2y 2 c /o dividend, at 
least, in 1907, with a steady increase in this dividend from the in- 
creased revenues provided under the contract with the United 
States Steel Corporation. With these prospects it would seem 
that these certificates should eventually sell around par, and pur- 
chased at around the low prices of 1907 — $50 per share — would be 
an equally attractive investment. Apparently the sole factor which 
would militate against a higher price is the fact that thus far 
the certificates represent simply shares in a blind pool, con- 
cerning which little or no information has been offered. The ore 
properties are absolutely in the hands of the three trustees, 
President Hill and his two sons. But the income of these 
certificates is in some sense doubly guaranteed, first of all by 
the contract with the Steel Corporation, and secondly by the 
great body of ore which the certificates cover. This ore must 
be of constantly increasing value and it seems likely that the 
annual output called for by the contract will be exceeded, rather 
than held to the minimum limit imposed. 

It is not improbable that after the slight panic occasioned by 
the circumstances narrated above has passed, both the ore 
certificates and Great Northern stock will tend to sell, in the 
long run, at very much higher figures. 



HOCKING VALLEY RAILWAY. 

The Hocking Valley is a coal road, through central Ohio, 
from Toledo to the Ohio River. It directly operates 347 miles of 
road and owns practically all of the capital stock, both common 
and preferred of the Toledo & Ohio Central, a parallel road 
throughout almost the entire length, operating 441 miles. On 
August 1st, 1906, it also owned a majority of the outstanding 
stock of the Kanawha & Michigan, operating a total of 177 
miles and extending the system into West Virginia, on the line 
of the Chesapeake & Ohio. This stock was apparently taken 
over from the Toledo & Ohio Central, by which it had been 
owned since 1890. In August, 1906, the plan was brought out 
for the consolidation of the Hocking Valley and the Kanawha 
& Michigan, but this plan was postponed parti} on account of 
the bond market, partly on account of the suit brought by the 
attorney general of Ohio to prevent the consolidation, on the 
ground that it was a violation of the Valentine trust law of that 
state. 

In 1903 practical control of the Hocking Valley was secured 
jointly by five roads through the purchase of $6,924,200 of the 
outstanding common stock, the purchasing companies being 
the Pittsburgh, Cincinnati, Chicago & St. Louis, one-third in- 
terest, and the Baltimore & Ohio, Chesapeake & Ohio, Lake 
Shore & Michigan Southern and Erie Railroad one-sixth interest, 
each, the purchase being on a basis of $103 per share. This 
stock is held in trust by J. P. Morgan & Co., that firm issuing 
5% "participating certificates" to the amount of the purchase 
price, secured by the stock and guaranteed by the several pur- 
chasing companies. 

The Hocking Valley Railway was the successor, in 1899, 
of the Columbus, Hocking Valley & Toledo Railway, and valua- 
ble coal properties were taken over at the time of the reorganiza- 
tion. 

23 (353) 



354 HOCKING VALLEY 

In 1906 the directorate included president N. Monsarrat, 
vice-president Ralph W. Hickox, second vice-president James 
H. Hoyt, R. M. Gallaway, president Merchants National Bank, 
New York; Charles B. Alexander, S. P. Bush, W. N. Cott, A. H. 
Gillard, C. G. Hickox, P. W. Huntington, Thomas F. Ryan, R. 
S. Warner, and H. R. Wilson. 

Capitalization. 

As of June 30th, 1906, the capital account stood as follows : 

Common stock : $11,000,000 

Preferred stock 15,000,000 

Total stock $26,000,000 

Funded debt 20,770,524 

Nominal capital $46,770,524 

Rentals cap. at 4% 5,675,000 

Approx. gross capitalization $52,445,524 

Securities held 12,894,681 

Approx. net capitalization $39,550,843 

Average net capital, per mile $113,970 

Average miles operated 347 

Net earnings on net capitalization 6.2% 

Stock on net capitalization 65% 

Fixed Charges on Total net Income. . . . 31% 

Factor of Safety 69% 

It will be seen that the estimated net capitalization is high 
even for a road earning as it did in 1906, $18,558 per mile. The 
showing of net earnings on net capitalization, 6.2%, was after 
very heavy maintenance, and this figure would be increased if 
these charges had been more nearly on the same basis of other 
roads in the same territory. 

It will be seen that the larger part, almost two-thirds, of 
the net capitalization was represented by stock and in 1906 fixed 
charges consumed only 31% of the total net income, even after 
the heavy maintenance charges noted. This left a high margin 
of safety for the underlying securities. 



HOCKING VALLEY 



355 



The item of securities owned includes $1,237,500 equipment 
notes of the Kanawha & Michigan Railway. The balance in- 
cludes over 99% of the stock of the Toledo & Ohio Central out 
of a total of $6,500,000 common, and $3,708,000 preferred. Al- 
though the securities held are not itemized by the report, the 
figure given presumably included also the $4,510,000, par value 
of the Kanawha & Michigan, representing a controlling interest 
in that road. On the Toledo & Ohio Central stock no dividends 
had been received for some years, but the earnings of that road 
in 1906, after heavy maintenance charges, and before charging off 
large appropriations for improvements, were equivalent to 5% 
on the preferred and 6.3% on the common. In other words, the 
Hocking Valley's equity in the earnings of the Toledo & Ohio 
Central for 1906 were nominally in excess of half a million dollars, 
and, actually, considerably more. 

No dividends were paid likewise by the Kanawha & Michi- 
gan and its nominal net surplus was equivalent to only about 
3.3% of the stock. This, however, was after very heavy charges 
for maintenance and the actual earnings on a normal mainte- 
nance basis were probably more than twice this. 

Stability of Traffic. 

The Hocking Valley is very largely a coal road, the coal 
tonnage for 1906 representing over 60% of the entire tonnage. 
The earnings since the reorganization have compared as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


346 
347 
347 
347 
347 
347 
347 


$4,417,267 

4 ,653 ,258 
5,316,523 
6 ,049 ,598 

5 ,725 ,483 
6,013,215 
6,439,809 


$12,766 
13 ,409 
15,321 
17,434 
16,500 
17,330 
18,558 



Maintenance. 



The traffic density and maintenance for a period of six years 
have compared as follows : 



356 



HOCKING VALLEY 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5. ..... . 

1905-6 


2,437,218 
2,891,561 
3,034,866 
2,553,133 

2 ,877 ,743 
2,875,387 


$1 ,489 
1,637 
1,747 
1,701 

1,877 
1,984 


$2,154 
2,479 
3,229 
3,377 
3,728 
3,819 


$3 ,643 
4,116 
4,976 
5,078 
5,605 
5,803 


Average 


2,778,318 


$1 ,739 


$3,131 


$4 ,870 


Tol. & 0. Cen. 
Tol.St.L.&W. 


1 ,423 ,424 
1,046,139 


$1 ,225 
996 


$1 ,471 
959 


$2 ,696 
1,955 



It will be seen that the maintenance charges have been very 
high, and would compare with eastern trunk lines of similar 
traffic density. Probably the maintenance charges for 1905 and 
1906 were considerably in excess of $1,000 per mile over the 
actual needs of the road, and this amount might legitimately be 
added to the surplus shown for these two years. But on the 
other hand, these charges include the appropriations for improve- 
ments and there were no separate items for this latter amount. 

Surplus Earnings. 

For a period of six years the surplus available for dividends 
has compared as follows: 



Year 


Surplus 


Dividends 

on 

Preferred 

Stock 


Per cent. 

Earned 
on Stock 

Capital 


Dividends 

Paid 

on 

Common 


Average 
Price 

Calendar 
Year 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


$1,354,177 
1 ,602 ,373 
1,824,199 
1 ,404 ,793 
1 ,427 ,851 
1 ,772 ,933 


3* 

4 
4 
4 
4 
4 


5.5 
6.5 
7.3 
5.4 
5.5 
6.5 


3 
3 
3 
3 
3 
3 


57 

83 

84 

77 

104 

124 



The dividend record of the road since its reorganization has 
been as follows: 

Preferred. Common. 

1900 sy 2 % 

1901 , 4 3% 

1902 4 3 

1903 4 3 

1904 4 3 

1905 4 3 

1906 4 3 



HOCKING VALLEY 357 

The Balance Sheet. 

As of June 30th, 1906, the balance sheet showed : 

Current assets $4,343,861 

Current liabilities 1,509,324 

Leaving a working balance of $2,834,537 

The item of cash amounted to $2,007,644. The balance to 
credit of profit and loss was $4,721,990. 

Not included in the capital account given were car trust 
bonds to the amount of $960,000. This was offset by advances 
to subsidiary companies of $2,999,819. 

Consolidation Plan. 

According to the circular issued to the stockholders of the 
Hocking Valley and the Kanawha & Michigan Railroads, the 
consolidation plan involved the retirement of the $15,000,000 of 
preferred stock of the Hocking Valley, which may be retired at 
par, and the exchange of $11,000,000 of common for $11,000,000 
stock in the new company. In lieu of the $4,490,000 stock of the 
Kanawha & Michigan outstanding in the hands of the public, 
there was to be issued of stock in the new company, $2,694,000 
par value, and in lieu of the remaining stock of the Kanawha & 
Michigan Company held by the Hocking Valley, amounting to 
$4,510,000 (the treasury stock to be cancelled), $56,000 of stock 
of the new company. 

Holders of the preferred stock of the Hocking Valley were 
to be offered general lien 4% 30 year gold bonds to the amount 
of $110 for each $100 of the preferred stock. The exchange of 
common stock for stock in the new company was to be on a par 
basis, and the stock of the Kanawha & Michigan on a basis of 
$60 par value stock of the new companv for each $100 of the old. 
Under this arrangement, $17,000,000 of the new general lien 
bonds would be exchanged for stock, and the total stock of the 
new company on this basis would be $13,750,000, as against a 
combined issue of $35,000,000 of stock of the two consolidating 
companies. The effect of this conversion plan would be to give* 
the five roads holding a large majority of the common stock of 
the Hocking Valley, absolute control of the consolidated com- 
pany. The balance of $13,000,000 of the proposed issue of gen- 
eral lien bonds was to be reserved for future issue. 



358 HOCKING VALLEY 

Investment Value. 

Hocking Valley preferred is redeemable at par, entitled 
to 4% non-cumulative dividends, but after 4% have been paid on 
both preferred and common, both classes of stock are entitled to 
share alike. The dividends have been paid in full since 1900. 
The yield from the bonds to be issued for this stock at $110, 
under the consolidation plan, would be slightly in excess of this, 
or 4.4%. 

Dividends of 3% have been paid on the common stock since 
1901. Reference to the surplus earnings will show that this has 
been comfortably earned and on a basis of less liberal mainte- 
nance charges, might readily have been increased. Under the 
conversion plan, the common stockholders receive new stock of 
the same nominal value but the actual value should be very con- 
siderably augmented — first, because the nominal capital of the 
combined roads has been reduced by $4,250,000, with very little 
increase in the fixed charges (as compared with the 4% divi- 
dends paid on the preferred stock of the Hocking Valley), and 
secondly, because the $13,750,000 of stock in the new company 
will have the entire equity in the surplus earnings ot the com- 
bined roads. The earnings of the Kanawha & Michigan are 
amply sufficient to pay much more than a 3% dividend (as on the 
old Hocking Valley common) on the $2,750,000 of stock of the 
new company to be issued in lieu of the $9,000,000 stock out- 
standing. 

In 1902, Hocking Valley common rose as high as $106 per 
share, declining in the subsequent reaction to $60. It rose to 
$121 in 1905 and as high as $135 per share in 1906. It is rather 
difficult to understand these high quotations, because there is 
only a little more than $4,000,000 of this stock outstanding and 
the control of the road is held absolutely by the five companies 
participating in the purchase of 1903. These prices would hardly 
have been justified by expectation of less than a 6% dividend and 
this dividend could scarcely have been paid unless the mainte- 
nance charges of the road had been considerably scaled. In May, 
1907, the stock sold at $75 per share. 

Unless a serious general reaction should ensue, vitally affect- 
ing the coal business, it does not seem improbable that the new 
Hocking Valley Company might readily earn the 4% required 
for the proposed issue of $17,000,000 of bonds, and comfortably 



HOCKING VALLEY 359 

pay a dividend of 5 or 6% on the $13,750,000 stock of the new 
company. But the permanency of these dividends would rest 
upon the continuance of a high degree of prosperity in the coal 
industry and therefore should be considered on much the same 
basis as the stocks of the Baltimore & Ohio and other bituminous 
coal roads. Should the annual high interest rates of 1906 con- 
tinue, the new Hocking Valley stock could scarcely be worth 
much above par, but were these interest rates to decline, it 
might readily sell at higher figures. 



ILLINOIS CENTRAL RAILROAD. 

Up to 1906, the Illinois Central was .one of the great inde- 
pendent lines of the country and the chief north and south road 
of the Mississippi Valley. Its main lines reach from Chicago to 
New Orleans, to all intents, with its subsidiary lines, a double 
track the entire distance, and it has also an extension westward 
from Chicago through Illinois and northern Iowa, to Omaha, 
Sioux City and Sioux Falls. 

The Illinois Central directly operates 4,459 miles and with 
the 1,239 miles of its subsidiary, the Yazoo and Mississippi Val- 
ley, a total of about 5,700 miles. The gross earnings of the entire 
system in 1906 were above sixty million dollars. The capitalization 
is moderate ; the road has been under sound and conservative man- 
agement and its securities and its stock have commanded a high 
premium. 

History. 

Even while Chicago was still a village an attempt was made 
to raise money to build a line connecting Lake Michigan with the 
Ohio River. This was far back in 1834, when the Erie and the 
Baltimore and Ohio had just been started, and the people of this 
Far West of America sought more rapid communication with 
the East; but it was not until 1851 that the Illinois Central Rail- 
road was chartered. 

Through the government it had received a magnificent land 
grant, a strip twelve miles broad running north and south 
throughout Illinois. In lieu of taxes the company was to pay 
the state 7% of its gross earnings, on its original 700 miles of 
road in Illinois. Between 1852 and 1871 the road had realized 
io less than $24,000,000 from the sale of these lands, or quite 
enough to pay for the Illinois property outright. The line from 
Chicago to Dubuque was begun in 1855, and the through line to 
Cairo at the junction of the Ohio and Mississippi in 1856. The 

(360) 



ILLINOIS CENTRAL 361 

construction and leasing in 1867 of the Dubuque and Sioux City 
carried the line through Iowa, and in 1882 the Chicago, St. Louis 
and New Orleans was leased and its stock absorbed, and this 
carried the lines of the system south from Memphis to New 
Orleans. The purchase of the Louisville, New Orleans and Texas 
and its consolidation with the Yazoo and Mississippi Valley in 
1882, with subsequent constructions, has given the road a per- 
fect network of lines extending down the eastern side of the 
Mississippi, through Illinois, Kentucky, Tennessee and Missis- 
sippi. An extension, with trackage rights, will carry the road into 
Birmingham, Ala., and another extension into Indianapolis. 

The peculiarity of the Illinois Central is the fact that it 
is practically a watergrade line throughout its main length, and 
that with an average freight rate of only .55c per ton per mile, it 
is able to earn large profits. Within very recent years it has like- 
wise profited by the increasing popularity of the Gulf as a grain 
route from the fields of the west, a competition that is now being 
keenly felt by the eastern trunk lines. 

Ownership. 

The Illinois Central from its organization had enjoyed an 
exceptional degree of independence, its stock being widely dis- 
tributed, and no single interest dominating. In 1905 it reported 
9,123 shareholders. The formation in 1902 of the Railroad Securi- 
ties Company introduced a new element into the question of con- 
trol. The company was formed by a union of the Fish, Speyer 
and Harriman-Kuhn Loeb interests, owning then about $8,000,- 
000 of Illinois Central stock, and the company was formed for 
the purpose of further purchases. The Speyer holdings were 
sold to the Harriman interest with the result of considerably 
increasing the Harriman influence in the Illinois Central, and in 
1906 this interest came into practical control. 

For years President Fish had voted the majority of the stock 
from proxies held, and in 1906 still held a majority by proxy, 
outside the Harriman holdings. But in the following election of 
president by the trustees, eight of the directors voted against Mr. 
Fish and chose J. T. Harahan president. The directors voting 
for Mr. Harahan were J. T. Harahan, E. H. Harriman, Chas. A. 
Peabody, President of the Mutual Life Insurance Company and 
formerly attorney of the Astor estate ; J. W. Auchincloss, a mem- 



362 ILLINOIS CENTRAL 

ber of the so-called white-washing Investigating Committee of 
the Mutual Life Insurance Company, from which Mr. Fish has 
resigned because of the refusal of the committee to make a more 
thorough examination of the company's officers ; John Jacob 
Astor, Robert W. Goelet, of the Goelet estate ; and Cornelius 
Vanderbilt. 

Of these. Messrs. Harriman, Peabody and Goelet are di- 
rectors of the Union Pacific. Mr. Harahan was then second vice- 
president of the Illinois Central and had long been closely asso- 
ciated with Mr. Fish. 

Supporting Mr. Fish were Governor Chas. S. Deneen, ex- 
officio director, as Governor of Illinois ; Chas. M. Beach, James 
DeWitt Cutting and John C. Welling, vice-president, the latter not 
present at the meeting. 

It appeared subsequently in the testimony taken by the Inter- 
state Commerce Commission that the Union Pacific had pur- 
chased the holdings of the Railroad Securities Company, chiefly 
owned by Mr. Harriman, the president of the Union Pacific, and 
had otherwise acquired sufficient stock to bring the total up to 
about 29% of the $90,000,000 of outstanding stock. This stock 
was purchased by the Union Pacific at about $175 per share, or 
very nearly the top price reached by the stock during the struggle 
of the Harriman-Fish interests for control. A few months subse- 
quent to this purchase Illinois Central stock was selling at around 
$135 per share. 



Capitalization. 

Ten millions of Leased Lines stock was issued in exchange 
for an equal amount of Chicago, St. Louis, New Orleans stock 
and is secured by a deposit in trust of the latter stock. It is guar- 
anteed at the rate of 4% per annum and in case of default for 
sixty days in any semi-annual payment the holders of the cer- 
tificates will be entitled to the return of the stock so pledged. In 
the following table this stock has been included as a part of the 
interest debt of the company. 



ILLINOIS CENTRAL 363 

On June 30th, 1906, the capital account stood as follows : 

Common stock $95,040,000 

Funded debt, 111. Cent 128,660,275 

Funded debt, C. St. L. & N. 16,234,000 

Leased line stock (4% guar.) 10,000,000 

Total capital $249,934,275 

Rentals capit. at 4% 28,680,000 

Approx. gross capit $278,614,275 

Securities held 60,315,548 

Approx. net capital $218,298,727 

Approx. net capital, per mile $49,790 

Average miles operated 4,424 

Net earnings on net capitalization. . . . 7.9% 

Stock on net capitalization 43% 

Fixed Charges on total net income . . . 47% 

Factor of Safety 53% 

The item of rentals capitalized is the $1,187,000 net interest 
paid as the rental on the Dubuque and Sioux City. 

With this addition it will be seen that the approximate net 
capitalization amounts to $49,790 per mile as against, for ex- 
ample, a similar estimate of $114,480 per mile for the Alton; 
$39,684 for the Louisville and Nashville, and $46,710 for the St. 
Louis and San Francisco. 

This capitalization is very moderate for a road of the 
strength and position of the Illinois Central and in the face of 
rather unusual maintenance charges, the net earnings of 1906 
showed 7.9% on this estimated net capitalization. This figure 
stood against similar estimates of 3.7% for the Alton ; 8.9% for 
the Louisville and Nashville ; and 4.8% for the St. Louis and San 
Francisco, all roads of more or less the same character. 

It will be seen that the stock amounts to considerably less 
than half of the estimated net capitalization but the credit of the 
Central is high, and even after the maintenance charges already 
referred to, Fixed Charges consumed only 47% of the Total Net 
Income, leaving a Factor of Safety on the underlying securities 
of 53%. 



364 ILLINOIS CENTRAL 

Equities Owned. 

On the $60,000,000 of securities owned in the treasury, the 
company received in 1906 a net of $3,255,398, equivalent to 5.2% 
on the book valuation. 

These securities are rather widely distributed and are chiefly 
the stocks and bonds of leased lines. The most notable item and 
the only one in which lies any considerable equity, is $9,104,000 
5% second mortgage bonds of the Louisville, New Or- 
leans and Texas ; and $9,904,000 land grant income bonds 
of the same road. This is now a part of the Yazoo 
and Mississippi Valley. On the land grant bonds no 
interest has ever been paid, and there is no great prospect that 
any will be paid in the immediate future. In regard to the sec- 
ond mortgage bonds, it is provided that the interest is only to 
be paid when so determined by the board of directors, but the 
interest is cumulative, and in case less than 2^2% is paid, the un- 
paid interest, with the interest on the interest at 5%, is carried 
forward to the credit of the bonds for subsequent payment. On 
these bonds the Illinois Central received payments from 1893 to 
1903, ranging from $1,980,000 to $1,016,000 per annum. None has 
been paid since, and in 1906 the arrears of interest on these 
bonds amounted to $6,567,843. This is not carried on the books 
of the Illinois Central as an asset, but the arrearages would 
necessarily absorb the surplus earnings of the road for some 
years to come. In the discussion on the Yazoo and Mississippi 
Valley, it will be seen that the maintenance was so heavily 
charged that there was a considerable excess maintenance charge 
amounting to perhaps $700 per mile, and this on the total mile- 
age, would have left a surplus on the year's earnings of the road 
of about $850,000, which might legitimately have been paid into 
the treasury of the Illinois Central. 

Increase of Capitalization. 

Through the sale of stock at par to stockholders in 1901-2, 
the capital stock of the road was increased by about 50%, and 
the sum so derived was devoted mainly to double tracking and 
other improvements which are now almost complete. In 1906 
there were 750 miles of extra main track on the whole line. The 
larger part of the increase in Funded Debt is due to the issue of 



ILLINOIS CENTRAL 



365 



purchase line bonds distributed over about 730 miles of added 
track. The comparison of increase for six years is as follows : 



Year 


Common 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1899-1900 

1905-1906 


$60 ,000 ,000 
95 ,040 ,000 


$130,873,925 
154,894,275 


$190,873,925 
249,934,275 


$32,611,967 
51,636,405 



Increase over six years: Total capital, 31%; gross earn- 
ings, 60%. 

Character of Traffic. 

The Illinois Central is one of the few roads giving very full 
reports of its operations which does not itemize or give any indi- 
cation as to the character of its traffic. That this traffic is in 
general of low grade is indicated in the low average rate per ton 
per mile. This amounted to only .58c in 1905 and .55c in 1906. 
The decrease in 1906 was probably due in part to the increased 
carriage of grain to the Gulf. 

Stability of Earnings. 

Since 1896 the mileage and earnings of the road have stood as 
follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


3,067 
3,130 
3,775 
3,671 
3,845 
4,215 
4,276 
4,293 
4,340 
4,374 
4,424 


$22 ,002 ,842 
22,110,938 
27,317,820 
28,114,690 
32,611,967 
36 ,900 ,460 
40 ,821 ,030 
45,186,077 
46,831,136 
49 ,508 ,650 
51,636,405 


$7,174 

7,064 

7 ,236 

7 ,658 ' 

8,481 

8,754 

9,546 
10,526 
10,790 
11,319 
11,672 



It will be seen that with about a fifty per cent, increase in 
operated mileage, the gross earnings have increased more than 
one hundred per cent., raising the average per mile from $7,174 
in 1896 to $11,672 in 1906. 

This increase was very gradual and reflects the solid char- 
acter of the road. 



366 



ILLINOIS CENTRAL 
Maintenance. 



The Illinois Central is from the lie of its lines unusually 
subject to flood damage, and its maintenance of way is therefore 
considerably higher than that of other roads in the middle west. 
For example, the maintenane of way of the St. Paul in 1906 
was $855 as against $1,549 for the Central, but it should be 
remembered that the traffic density of the Central is double that 
of St. Paul. The items through a series of years have been as 
follows : 







Maintenance per Mile 




Year 


Traffic Density 






Total 










Way 


Equipment 




1900-1 


952 ,808 


$1 ,390 


$1 ,033 


$2 ,423 


1901-2 


1 ,041 ,177 


1,321 


1,237 


2,558 


1902-3 


1,205,816 


1,376 


1,455 


2,831 


1903-4 


1,202,929 


1,308 


1,675 


2,983 


1904-5 


1 ,270 ,977 


1,393 


1,778 


3,171 


1905-6 


1 ,408 ,403 


1,549 


1,740 
$1 ,486 


3,289 


Average 


1,180,351 


$1 ,389 


$2 ,872 



Extra main track, 750 miles. 



Alton 

L. &N 

St. L. & S. F. 



1,099,515 
929 ,594 
448 ,625 



51 ,371 

1,490 

814 



$1 ,273 

1,537 

703 



\2 ,644 
3,027 
1,517 



Improvements From Earnings. 



In addition to the very liberal maintenance, the following 
appropriations have been made from the surplus earnings for 
improvements : 

1900-1 $3,145,400 

1901-2 4,340,172 

1902-3 4,881,253 

1903-4 2,579,329 

1904-5 1,683,886 

1905-6 4,164,739 

Total, six years $20,794,779 

These heavy appropriations indicate the highly conservative 
character of the management, and its disposition to charge im- 
provements to earnings. 



ILLINOIS CENTRAL 
Surplus Earnings. 



367 



Before charging off Surplus Earnings the annual surplus 
from 1901 has been as follows : 



Year 


Surplus 


Per cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Average 
Price 


1900-1 


$6 ,967 ,659 
9 ,790 ,462 

10,729,393 
8,865,928 

10,135,342 

10,862,339 


10.5 
12.4 
11.2 
9.3 
10.6 
11.4 


6 
6 
6 
6 
6 and 1 % 
7 


130 


1901-2 


140 


1901-3 


149 


1903-4 


134 


1904-5 


136 


1905-6 


166 







It will be seen that in 1906 practically all of the surplus earn- 
ings over and above the 7% dividend was turned back into the 
road. 

Dividend Record. 

The Illinois Central, through three great periods of depres- 
sion has still been able to keep on its feet, and continue its divi- 
dend payments. Since the opening of the road, from 1865 to 
1906, $120,000,000 has been received by the stockholders in divi- 
dends, in addition to the scrip distributions. In the same period 
the company has received for improvements from income over 
$110,000,000 in cash. In forty years the road has never missed a 
dividend. The dividend record since 1865 stands as follows : 



Year Per cent. 

1865-73 10 

1874-6 8 

1877 4 

1878-80 6 

1881—2 7 

1883. . .' .' .' .' .' .' .' 8 and 17% in Chi., St. L. & N. O. stock 

exchangeable for leased line certificates. 

1884 10 

1885 8 

1886 7* 

1887-8 7 

1889 5* 

18S0 6 

1891-9 5 

1900 5£ 

1901-4 6 

1905- 6 and 1 % extra. 

1906 7 



368 ILLINOIS CENTRAL 

The Balance Sheet. 

The balance sheet as of June 30th, 1906, showed : 

Current assets $7,337,693 

Current liabilities — 

Payable on demand $6,513,930 

Payable at future dates 3,076,757—9,590,687 

Leaving a debit balance of $2,252,994 

Of the assets the item of cash was $1,591,523. 

The balance to credit of profit and loss was small, amount- 
ing to $3,160,960. 

In addition to these items there was about $5,500,000 car- 
ried in various special funds for improvements, etc. 

Investment Value. 

The Illinois Central has always been highly prized as an 
investment stock both at home and abroad, and quotations on the 
stock have ruled high. From 1901 to 1904 inclusive 6% divi- 
dends were paid, and in this period the price ranged from $124 
to $173 per share, reaching the latter figure in the boom of 1902. 
In the slump of 1904 the stock declined to $126. 

In 1905 an extra dividend of 1% was declared, and in 1906 
the road was put upon a regular 7% basis. The stock reached a 
record price of $184 in June of 1906. This high figure was un- 
doubtedly due to the fact that all the available supply was being 
picked up in the Harriman struggle for the control of the road. 

There is very little stock in the market, and it is for the most 
part closely held. Control of the road would undoubtedly com- 
mand $200 per share or more, but in the decline of 1907 
the stock fell as low as $134 per share. The road is amply earn- 
ing its dividend ; it is being liberally maintained ; large sums are 
being turned back for improvements ; in its own territory it is 
almost impregnable ; in brief, there are few railway properties in 
the country in as solid position financially and otherwise, as the 
Central. Its extension has been steady though not rapid. Its 
policy is very conservative, and under the Fish regime it repre- 
sented the highest character of an investment stock. 

It was not particularly attractive as a speculation because 
the fluctuations in its price were not heavy. 



ILLINOIS CENTRAL 369 

Should the road pass completely under the Harriman 
domination the suggestion has been made that it might be leased 
to the Union Pacific. That road could guarantee 7% dividends. 
It is probable that even a guarantee of 8% would not be regarded 
as excessive for so valuable a property. 

The Illinois Central has been in some sense the protege of 
the state from which it derives its name, and it is probable that 
neither the people of that state nor the great body of shareholders 
would regard a lease with favor. Probably, therefore, all that 
Harriman control would mean would be much closer working 
relations with the Union Pacific and the Southern Pacific, and 
the introduction of Harriman methods into its management. 

i\t $140 per share the yield is just 5%, with a high degree 
of security for a railway stock. With the great advantages of its 
watergrade line to the Gulf, and its wide ramifications, its earn- 
ings will almost inevitably steadily increase and should no 
serious depression ensue the stock should steadily increase in 
value. 

Higher dividends than 7% do not excite the same enthusi- 
asm among shippers and patrons as among stockholders, and the 
stock is more likely to be held at its present dividend than either 
increased or decreased. It is not likely that at any time any con- 
siderable quantity of stock would be thrown upon the market ; at 
any specially attractive price, it would be snapped up by various 
interests. At anything like about $140 per share, the conserva- 
tive investor will probably conclude that he is obtaining a very 
solid stock, with quotations which are more likely to show him a 
gain than a loss, even though some recession should come from 
the prosperity of 1906. 



24 



INTERNATIONAL AND GREAT NORTHERN 

RAILROAD. 

The International & Great Northern Railroad is a part of the 
Missouri Pacific system, and is controlled in the interest of that 
road, but is separately operated. The line extends from Longview 
on the Texas & Pacific southwesterly through Austin to Laredo 
on the Mexican border, where it joins the National Railroad of 
Mexico. Branch lines reach to Houston, Texas. 

As of January 1st, 1906, the company had outstanding: 

Stock $9,755,000 

Funded Debt .23,390,252 

Total $33,145,252 

Average mileage operated — 1,160. 
Capitalization per mile — $30,298. 

For the calendar year of 1906 the road showed: 

Gross Earnings $7,752,108 

Net Earnings 1,786,799 

Fixed Charges 1,862,797 

Deficit for the year 69,556 

Maintenance of way amounted to $1,137 and maintenance of 
equipment to $902, or a total of $2,039. This on a road earning 
$6,688 per mile, with a traffic density of only about 400,000 ton 
miles, is very high maintenance, and probably represented an excess 
for the year of several hundred dollars per mile. The report states 
that included in expenses were betterments to the amount of 
$249,555, and this with new steel rail laid in 1906 and other laid in 
previous years, charged to 1906 income, amounted to $374,006. 
The total betterments of 1905 amounted to $616,877. 

With practically no increase in obligations, the gross earnings 
of 1906 increased $1,213,170. In other words, it is apparent that 
the road has been devoting all its surplus earnings to improvements 

(370) 



INTERNATIONAL & GREAT NORTHERN 371 

and thus growing up to what was originally an excessive capitaliza- 
tion. 

On the showing of 1906 actual fixed charges and taxes con- 
sumed 84 per cent, of the total net income, so that the deficit shown 
was created by improvements charged to operating expenses. This 
means that the underlying securities are growing in solidity. The 
nominal deficit for the previous year amounted to $581,465. Actual- 
ly, the road earned a slight surplus above its fixed charges. 

If the actual surplus of 1906 be taken in the neighborhood of 
$300,000, this was equivalent to about 3 per cent, on the outstanding 
capital stock. If no heavy set-back from the tremendous prosperity 
which Texas has been enjoying should ensue, it is evident that the 
securities of this road should slowly increase in value. The stock is 
not quoted on the New York Stock Exchange. 



IOWA CENTRAL RAILWAY. 

The Iowa Central is to all intents a part of the Minneapolis and 
St. Louis. Although it operates separately, it has practically the 
same operating officers, and very nearly the same board of directors, 
the two notable additions to its directorate over that of the Minne- 
apolis and St. Louis being Paul Morton, president of the Equitable 
Life Assurance Society, and Theodore P. Shonts, president of the 
Interborough. 

The road is a reorganization in 1888 of the Central Iowa Rail- 
road. Its main line extends from Peoria, 111., westward to Oska 
loosa, la., and northward from there to Albert Lea, Minn., where it 
joins the Minneapolis and St. Louis. 

The main business of the road is the haulage of coal and grain 
from central Iowa eastward and northward. The gross earnings of 
the road are relatively small, the capitalization is high, and in the 
two years preceding 1906 the operations showed a deficit even after 
very moderate maintenance charges. 

Capitalization. 

Excluding $3,270,000 of first and refunding 4 per cent, bonds, 
held in the treasury, the capital account of the road on June 30th, 
1906, stood as follows: 

Common stock $ 8,524,683 

Preferred stock 5,674,771 

Total stock $14,199,454 

• Funded debt (net) 9,270,294 

Loans 1,875,100 

Total capital $25,344,848 

Total capital, per mile $45,220 

Average miles operated 558 

Net earnings on net capital 3.4% 

Stock on net capitalization 56% 

Fixed charges on total net income 79% 

Factor of safety 21 % 

(372) 



IOWA CENTRAL 



373 



It will be seen from the above estimate that the capitalization 
of the road is very heavy compared with its earnings. The average 
capitalization of the Burlington, the St. Paul and the Northwestern 
is from $29,000 to $33,000 per mile, with gross earnings between 
$7,000 and $9,000 per mile. This stands against $45,220 per mile 
for the Iowa Central, with gross earnings of $5,300 in 1906. The 
fact of over-capitalization is further accentuated by the showing of 
net earnings on the net capitalization. The Iowa Central showed 
3.4 per cent, as against 9 per cent, and 10 per cent, for the roads 
above named. It is true that stock represents a considerable part 
of this watered capital, and that on this stock no dividends are being 
paid, but, on the other hand, even in the highly prosperous year of 
1906, and with no heavy charges for maintenance, the fixed charges 
consumed very nearly 80 per cent, of the total net income, while, as 
already stated, in the two preceding years under the same conditions 
a deficit was shown. 

The practical Factor of Safety, therefore, for the underlying 
securities taken over an average of three years is about zero. 

Inasmuch as it is substantially a part of the Minneapolis and 
St. Louis lines, it is not probable that its interest payments would be 
defaulted so long as the latter road was solvent. Reference to the. 
analysis of the Minneapolis shows, however, that the fixed charges 
of that road are likewise heavy, and even in 1906 consumed more 
than three-fourths of the Total Net Income. 

Earnings and Maintenance. 

The present interests operating the road obtained control in 
1900. The following table shows the gross earnings, the traffic 
density (in thousands of tons per mile), the maintenance of way 
and of equipment per mile, and the total expenditure for main- 
tenance for the six years that have elapsed since: 



Year 


Gross 
Earnings 


Traffic 
Density 


Maintenan 
Way 


ce per Mile 
Eqpt. 


Total 


1901 


$4,514 
4,558 
4,311 
4,260 
4,638 
5,304 


499 (000) 
530 " 
493 " 
520 " 
603 " 
721 " 


$1,249 
976 
930 
504 
735 
726 


$558 
621 
524 
572 
624 
618 


$1,807 


1902 


1,597 


1903 


1,454 


1904 


1,076 


1905 


1,359 


1906.. 


1,344 





It will be seen that at the beginning of the new administration 
the rehabilitation of the line was charged to operating expenses. 



374 IOWA CENTRAL 

The surplus (or deficit) remaining after all charges for the same 
six years has been as follows : 

1900-1 $ 7,048 

1901-2 2,915 

1902-3 1,643 

1903-4 81,132 (deficit) 

1904-5 77,074 (deficit) 

1905-6 237,442 

The surplus shown for 1906 was equivalent to 4.2 per cent, on 
the preferred stock. Only three dividends have been paid on the 
preferred since the reorganization in 1888. It was 1 per cent, m 
1892, 3 per cent, in 1899, \y 2 per cent, in 1900, and none since. 

The balance sheet on June 30th, 1906, showed: 

Current assets $574,5 1 1 

Current liabilities 436,495 

Leaving a working balance of $138,016 

The item of cash was $267,294. 

Against loans and bills payable of $1,875,000, the company held 
in its treasury $3,270,000 of its own unsold bonds. 

The balance to credit of profit and loss at the close of the 
year was $2,077,314. 

Investment Value. 

Iowa Central stocks have shown wide fluctuations, sufficient to 
show the speculative holder who might have taken hold of them at 
something like the lower figures, a very handsome profit. 

In 1901, the last year of the dividend on the preferred, that 
stock sold as high as $87 per share, and in 1902, at $90 per share. 
It was to be had for $30 per share in the following year, and $32 
in 1904. It rose to $61 in 1905 and $63 in 1906. It slumped off to 
$49 in the May decline of that year, and to $30 early in 1907. 

Similarly the common, which was buyable for $12 per share 
in 1900, sold at $51 in 1902, at $16 in 1903, $14 in 1904, $34 in 1906, 
and $18 early in 1907. 

In all this time there was no material change in the real value of 
this stock. In fact, both the common and the preferred sold at 
their highest figures in a year when the surplus had been practically 
wiped out, and it is to be noted at very much higher figures than 
in 1906, when the first real surplus in six years had been earned. 
This is one of the many anomalies to be found in price quotations. 



IOWA CENTRAL 375 

The simple fact is that stocks which have intrinsically little or no 
value are frequently boosted to high prices, more or less by manipu- 
lative influences, and they fall back again when this artificial sup- 
port is withdrawn. This makes investment in such stocks pure 
speculation. 

If, through a generally highly prosperous period the road has 
been able to earn practically no surplus save in the exceptional year 
of 1906, there seems little to indicate that the road would prove a 
dividend payer in the near future. Its earnings per mile from 1900 
up to 1905 were practically stationary, while those of almost all the 
other roads of the country showed a heavy increase. From all this 
the speculative investor will probably conclude that on any heavy 
general recession in prices, this is a stock which could be picked 
up at a low figure, and if stowed away for safe keeping might show 
a very good profit when better days came to the stock market, and 
the public was in a mood to invest in Governor Flower's famous 
"A. O. T." 



KANAWHA AND MICHIGAN RAILWAY. 

The Kanawha & Michigan is a small coal road extending from 
the Ohio River into West Virginia and serving as a feeder to the 
Hocking Valley-Toledo & Ohio Central system. A controlling 
interest in the property was acquired by the Toledo & Ohio Central 
in 1890, the latter road being in turn owned by the Hocking Valley. 
In 1906 it was proposed to merge the Hocking Valley and the 
Kanawha & Michigan, and under the plan of consolidation the stock- 
holders of the Kanawha & Michigan were to receive stock in the 
new company to 60 per cent, of their holdings in the old. This 
consolidation was brought about largely as the result of the demands 
of the minority shareholders for dividends. A committee repre- 
senting these interests was appointed in 1905, with George D. 
Mackay, chairman, to secure a distribution of the considerable net 
profits from the operations of the company. 

For a number of years operating expenses have been very 
heavily charged for improvements, the appropriations for mainte- 
nance of way in 1906 being $1,939 per mile and for equipment 
$3,007 per mile, on the basis of a freight traffic density of 1,973,883 
ton miles, and a very small passenger business. 

The excess of maintenance was certainly beyond $2,000 per 
mile, which on 177 miles of road would have represented an addition 
of about $350,000 to the nominal surplus of $306,174 shown, or the 
equivalent of about 7 per cent, on the outsanding $9,000,000 of 
capital stock. It is obvious from this that a dividend of 3 or 4 per 
cent, might readily have been paid in 1906. 

Under the proposed consolidation the $9,000,000 of Kanawha 
& Michigan stock is exchanged for $2,750,000 stock in the new 
company (the minority interest exchanging their stock on a basis of 
$60 stock in the new company for each $100 share, the controlling 
interest, representing $4,510,000 par value, held by the Hocking 
Valley, receiving only a nominal amount, $56,000). On this capi- 
talization the surplus earnings of the Kanawha & Michigan for 1906 
represented above 25 per cent. If the Hocking Valley's controlling 
interest be reckoned along with the other shares, the actual re- 

(376) 



KANAWHA & MICHIGAN 377 

duction of capital would be to a basis of $5,400,000, (i. e., $9,000,000 
of stock at $60 per share), on which the Kanawha & Michigan is 
comfortably earning 12 per cent. Either way, therefore, it will be 
seen that the consolidation should be highly profitable to the Hock- 
ing Valley. 

The Hocking Valley has been paying only 3 per cent., so that 
unless this dividend is increased, the Kanawha & Michigan minority 
holders will receive only 6-10 of this, or 1.8 per cent., as against 
3 or 4 per cent., which at the least might reasonably be declared 
on the stock. But there is no law to compel a controlling interest 
to declare dividends if it is indisposed, as was evident in the South- 
ern Pacific case, and the minority shareholders, therefore, probably 
have the option of accepting the proposed exchange or holding out 
indefinitely for better terms. Assuming that Hocking Valley is 
worth around par and will pay satisfactory dividends on this valua- 
tion — that is, for a coal road from 5 to 6 per cent., it would seem 
that the Kanawha stock were worth more than the valuation of 
$60 per share. Sometimes holding out has been very profitable. 



KANSAS CITY SOUTHERN RAILWAY. 

The Kansas City Southern is one of the independent roads cl 
the Southwest which has not yet come under control of any large 
system.. It operates an almost air line road from Kansas City to 
Port Arthur on the gulf, and in 1907 was constructing a branch line 
to New Orleans. The present company is a reorganization of the 
Kansas City, Pittsburg & Gulf, whose property was sold under 
foreclosure in 1900. The line had been built by Arthur E. Stillwell, 
the builder of the Kansas City, Mexico & Orient Railway. 

Control of the new company was vested in a voting trust con- 
sisting of John W. Gates of Chicago, E. H. Harriman, Herman 
Sielcken, George J. Gould, James Stillman, Louis Fitzgerald and 
Otto H. Kahn, of Kuhn, Loeb & Co. Mr. Harriman was made 
chairman of the executive committee. 

This voting trust expired in 1905, and an entirely new manage- 
ment came into control, headed by Herman Sielcken. The report 
for 1905 contained an elaborate analysis as to the condition of the 
road from various experts. It was stated that 25 per cent, of the 
engines were in bad order and 65 per cent, of the freight equipment 
unfit for use with freight demanding dry cars (the bulk of the south 
bound business), and that the road generally was in very bad con- 
dition. 

During the six months ended June 30th, 1905, there were 715 
wrecks on the line, and it was estimated that $7,000,000 would be 
required to restore the line to proper condition. 

The directorate of 1906 included Herman Sielcken, chairman ; 
James A. Blair of Blair and Co., bankers, prominently interested 
in the Seaboard Air Line ; Y. van den Berg of Ladenburg, Thalmann 
& Co., H. Rieman Duval, also a director in the Seaboard, Atchison, 
etc. ; L. F. Loree, D. G. Boissevain, Walter T. Rosen, Andrew J. 
Miller, Hugo Blumenthal, William F .Harrity, John J. Mitchell, 
Adolphus Busch, S. W. Fordyce, J. A. Edson and George M. Craig. 

The executive committee of 1906 consisted of L. F. Lore-, 
chairman, formerly president of the Baltimore & Ohio and later 

(378) 



KANSAS CITY SOUTHERN 379 

president of the Rock Island ; Herman Sielcken, H. Rieman Duval, 
D. G. Boissevain and Walter T. Rosen. 

Capitalization. 

As to June 30th, 1906, the capital account stood as follows : 

Common stock $30,000,000 

Preferred stock 21,000,000 

Total stock $51,000,000 

Funded Debt 30,000,000 

Notes . . . . 2,382,125 

Equipment Notes 1,968,000 

Total capital $85,450,125 

Total capital, per mile $103,204 

Average miles operated 827 

Net earnings on total capital 1.9% 

Stock on total capitalization 60% 

Fixed charges on total net income 54% 

Factor of safety 46% 

It will be seen that for a road with gross earnings of $9,000 per 
mile, the average capitalization of $103,204 per mile was for the 
larger part simply water. This average stands against an average 
of about $30,000 per mile for such standard roads as the Chicago 
& North Western, the Burlington, the St. Paul, etc. 

Even in the extremely prosperous year of 1906, net earnings 
showed only 1.9 per cent, on the capital as against an average of 9 
per cent, and 10 per cent, for the roads just named. Of this large 
capital, however, 60 per cent, was stock on which no dividends had 
ever been paid up to 1906 and on which little had ever been earned. 

Fixed charges in 1906 consumed 54 per cent, of the total net in- 
come, leaving a comfortable margin of safety for the underlying 
securities. Since the first year of the reorganization the funded debt 
has increased about eight millions and a half, the stock not at all, 
and in the meantime gross earnings have risen by nearly 80 per cent. 
This is an excellent showing, and could it be continued it would 
amply sustain dividends on the preferred. 

The Kansas City Southern owns all the stock of the Port Arthur 
Canal & Dock Company, the Kansas City, Shreveport & Gulf Ter 
minal Company and the Arkansas Western Railway Company. The 



380 



KANSAS CITY SOUTHERN 



earnings of these are small and the road has no other equities in 
other companies. 

Character and Stability of Traffic. 

In 1906 the tonnage of the road was made up of 19 per cent, 
farm products, 18 per cent, mine products, 45 per cent, forest pro- 
ducts, balance miscellaneous. The average rate received is low 
for a road in this section, amounting to .68 cents in 1906 as against 
.73 cents in 1905. From the year of the reorganization the earnings 
have compared as follows : 



Year 



1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 



Miles Operated 



833 
833 
833 
839 
839 
839 
827 



Gross Earnings 



K,118,763 
4,753,066 
5,450,871 
6,010,458 
6,450,320 
6,893,656 
7,568,332 



Per Mile 



$4,944 
5,705 
6,543 
7,164 
7,688 
8,216 
9,151 



Maintenance. 

The traffic density of the road has risen rapidly, increasing 
about 50 per cent, in six years. In the meantime maintenance 
charges have increased nearly 65 per cent., the items standing as 
follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 


685,733 
711,687 
795,912 
882,913 
887,077 
1,061,114 

837,406 


$844 
839 

1,053 
878 
967 

1,185 


$748 
919 
1,166 
1,227 
1,445 
1,431 

$1,156 


$1,592 
1,758 
2,219 
2,105 
2,412 
2,616 


Average 


$961 


$2,117 


M. K. & T.... 
St. L & S. F. 
St. L. & S. W. 
Atchison 


495,226 
448,625 
408,066 
577,005 


1,121 

814 

1,023 

1,123 


616 

703 

674 

1,113 


1,737 
1,517 
1,697 
2,236 



A road in the condition described in the report of 1905 was 
undoubtedly in need of much heavier maintenance than might other- 
wise have been required on a well-equipped road. From the com- 



KANSAS CITY SOUTHERN 



381 



parison below it will be seen that with an average traffic density of 
at least 50 per cent, more than that of the Atchison, the average ex- 
penditures were about the same in 1906. The average of the Louis- 
ville & Nashville, of the same traffic density, was nearly 50 per 
cent, higher. In 1906 the traffic density and expenditures of several 
roads compared as follows: 





Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 


M. K. &T.... 
Missouri Pac . . 
Rock Island . . 

Atchison 

Louis. & Nash. 

Kans. City So. 


460,359 
668,791 
514,767 
692,604 
950,304 

1,061,114 


$1,231 

857 

1,011 

1,477 

1,583 

1,185 


$671 

921 

923 

1,271 

1,886 

1,431 


$1,902 
1,778 
1,934 
2,748 
3,469 

2,616 



While, therefore, the maintenance of 1906 appears liberal as 
compared with that of the Missouri Pacific, it is not high as com- 
pared with the Missouri, Kansas & Texas and more prosperous 
roads, and it is, to an extent, deceptive ; in fact, a road in better 
condition could hardly have been maintained on a lower basis. 

The traffic density for 1906, including company freight, was 
actually 1,200,985, this heavy company tonnage being occasioned by 
the extensive improvements going on. The cost of this company 
tonnage, the report states, was charged to operating expenses. 

The improvements contemplated in the report of 1905 involved 
the expenditures in 1906 of $1,226,576 for the road and $2,341,779 
for additional equipment, or about half of the $7,000,000 estimated 
as required to put the road in proper condition. 

Surplus Earnings. 

On the basis of the maintenance charges shown above, the sur- 
plus for six years has been as follows : 



Year 



1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 





Per cent. 


Average 


Surplus 


Earned on 


Price 




Preferred 


Common 


$448,866 


2.2 


19 


916,335 


4. 


29 


652,370 


3.2 


26 


853,023 


4.2 


24 


735,212 


3.6 


29 


933,055 


4.6 


29 



382 KANSAS CITY SOUTHERN 

The Balance Sheet. 

Including $125,437 investments in marketable securities and 
$359,514 temporary investments in assets set aside for improvements, 
the balance sheet as of June 30th, 1906, showed : 

Current assets , $1,578,435 

Current liabilities 1,468,439 

Leaving a working balance of $109,996 

The item of cash was $221,946, and there was in addition a net 
of cash and materials for improvements on hand of $530,590, not in- 
cluded in the above estimate. The amount to credit of profit and 
loss was $943,629. 

It will be seen that the company was not very well supplied with 
working capital. 

Investment Value. 

The preferred stock is limited to non-cumulative dividends of 
4% per annum. By reference to the table above it will be seen that 
in three of the six years under view, this 4% was nominally earned 
on the preferred. For the first half of the fiscal year of 1907 the 
company has made heavy gains, indicating a surplus available for 
dividends of about twice that of the preceding year and a 4% divi- 
dend has been declared. The policy of this dividend seems doubtful. 
The territory covered by the Kansas City Southern has been enjoy- 
ing a remarkable boom and the road has profited thereby. If this 
improvement could be maintained it would be ample to sustain 
dividends on the preferred, but it would be astonishing if this rapid 
growth should continue. The stock sold as high as $71 per share 
in 1906, declining to $45 in March of 1907. Were earnings not to 
fall off it would represent an attractive purchase somewhere be- 
tween these figures to those who are willing to wait. A limited 4% 
stock under the high interest rates of 1906-7 would not tend, how- 
ever, to sell above $75, even under favorable conditions. 

After this review it is needless to add that the large amount 
of common stock is a pure speculation, and that dividends are 
scarcely likely for some years to come. It belongs to the class of 
stocks which are run up and down according to the state of the 
market, selling as high as $37 per share in 1906 and declining to 
$18 per share in March, 1907, in the face of an astonishing increase 
in the earnings of the road within the same time. This is one of 
the vagaries of the stock market, and indicates that it is general con- 



KANSAS CITY SOUTHERN 383 

ditions rather than values that determine the price of such stocks. 
Obviously, then, it might sell at very low prices under severe money 
conditions, and if picked up then and held for a general rise in the 
market it would undoubtedly represent a handsome profit to the 
investor. The road is not in the remotest danger of a receivership, 
even under a heavy recession of business, and the stock should in 
time represent solid value. Meanwhile, both the common and pre- 
ferred might readily be sought for the purpose of control by some 
large company, so that they might tend to sell at higher figures than 
otherwise. 



LAKE ERIE AND WESTERN RAILROAD. 

The Lake Erie and Western is another feeder of the Lake 
Shore, occupying much the same territory and partially paralleling 
the Big Four. It is a small road, operating 886 miles. The majority 
of its capital stock, $5,930,000 par value of preferred and an 
equal amount of the common, is owned by the Lake Shore. The 
present company was organized in 1887 to take over the property of 
the Lake Erie & Western Railway, sold under foreclosure the year 
before. The Northern Ohio Railroad is leased for 999 years, but 
the results from its operation were not included in the income before 
1900. The Lake Erie and Western owns the entire capital stock 
of this road, and guarantees its bonds as to principal and interest. 

The control of the road passed to the Vanderbilts in 1899, and 
the directorate was made up of representatives of the New York 
Central-Lake Shore, and its executive officers are the same as for the 
latter. 

Capitalization. 

The capital account January 1, 1907, stood as follows : 

Common stock $11,840,000 

Preferred stock 11,840,000 

Total $23,680,000 

Funded debt 10,875,000 

Northern Ohio 2,500,000 

Total capital $37,055,000 

Total capital, per mile $41,774 

Average miles operated 886 

Net earnings on net capital 3.9% 

Stock on total capitalization 64% 

Fixed charges on total net income 69% 

Factor of safety 31% 

(384) 



LAKE ERIE & WESTERN 



385 



The stock is obviously rather diluted, since the net earnings 
show only 3.9% on the estimated net capitalization. This is against 
an estimate of about 8.8% for the Michigan Central and 12.7% for 
the Lake Shore. The entire amount of the common stock is pure 
inflation, since no surplus is earned to provide it with dividends, and 
even if this amount ($11,840,000) were eliminated the net earnings 
would still have shown only 5.2% on the capitalization. 

In 1906 fixed charges consumed nearly 70% of the total net 
income, leaving a margin of safety for the underlying debt of only 
about 30%. On the other hand the stock represents 64% of the 
estimated net capitalization. 

The bonded debt, including $2,500,000 of the Northern Ohio 
5% bonds guaranteed by the company, amounts to $15,000 per 
mile, on a road with a traffic density of between six and seven hun- 
dred thousand ton-miles per mile of road. 

Neither the capital stock nor the funded debt has increased 
within the last ten years, save by the assumption of $2,500,000 of the 
Northern Ohio bonds. Gross earnings have increased about 50%, 
though part of this is due to the inclusion of the Northern Ohio 
since 1901. For a series of years the earnings show as follows : 



Year 

1897 

1898 

1899 

1900 

1901* 

1902 

1903 

1904 

1905 

1906 



I Miles 
Operated 



725 
725 
725 

725 

886 
886 
886 
886 
886 
886 



Gross 
Earnings 



53,326,587 
3,353,162 
3,787,301 
4,284,780 
4,533,204 
4,669,340 
5,218,728 
4,998,010 
5,037,294 
5,212,811 



Per 

Mile 



$4,588 
4,625 
5,223 
5,910 
5,110 
5,298 
5,884 
5,634 
5,679 
5,883 



* Includes Northern Ohio Railway. 

Maintenance. 

The maintenance charges averaged about $400 per mile 
less than the Grand Rapids & Indiana, for example, with a lower 
average traffic. In 1906, with a slightly lower traffic, the Lake Erie 
charges were nearly $1,000 per mile less than the Grand Rapids road. 
This difference would have been sufficient to wipe out the nominal 
surplus shown in both 1905 and 1906. It is to be noted further that 
in 1906, with somewhat increased traffic density, there was a decrease 
of about $200 per mile in the total maintenance from the average of 
the three years preceding. 

25 



386 



LAKE ERIE & WESTERN 



It is improbable, therefore, that the maintenance charges of 
1906 represented any concealed earnings. 

Besides the regular maintenance charges small sums have been 
set aside for several years for improvements, namely, $44,657 in 
1904, $70,138 in 1905 and $87,092 in 1906. 

The maintenance charges have been as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900 


660,843 
568,812 
514,897 
578,387 
608,677 
622,830 
662,364 

602,401 


$1,113 
1,064 
1,030 
974 
979 
833 
739 


$575 
588 
599 
928 
823 
986 
919 


$1,688 


1901* 

1902 


1,652 
1,629 


1903 


1,902 


1904 


1,802 


1905 


1,819 


1906 


1,658 






Average 


$961 


$774 


$1,735 


G R. & I 

Vandalia (2 yr) 


533,936 

887,411 


1,127 
1,290 


1,041 
1,802 


2,168 
3,092 



* Includes Northern Ohio Railway. 

Surplus Earnings. 

From 1900 the surplus earnings have shown as follows : 

1900 $716,168 

1901 • • 505,196 

1902 484,165 

1903 •• 489,010 

1904 366,489 

1905 • • 443,651 

- 1906 450,160 

This was equivalent to about 4% on the amount of preferred 
stock outstanding. 

The preferred stock is entitled to 6% non-cumulative dividends. 
In 1906 the dividend on the preferred was raised to 4%, and in order 
to pay this, the maintenance charges were somewhat reduced, as 
noted above. 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet showed: 

Current assets • • $637,383 

Current liabilities 1,961,527 



Leaving a debit balance of $1,324,144 



LAKE ERIE & WESTERN 387 

The amount of cash on hand was $222,491 and the balance to 
credit of profit and loss $222,417. 

The company was obviously not well provided with working 
capital. During the year there was charged to profit and loss on 
account of new equipment purchased, $210,270, and for adjustment 
of taxes and reduction in value of assets, $131,158. 

Investment Value. 

The preferred stock, then paying 3%, sold up as high as $138 
in 1902. There was nothing in the prospects of the road, nor in the 
subsequent performances to justify such a price. The control of 
the road is owned absolutely by the Lake Shore, so that the stock 
has no other value than as an investment. It sold down to $85 in 
1904. In 1906 it reached $92, declining in the spring of 1907 to $55 
per share. This was in the face of the fact that the dividend had 
been increased to 4%. It is obvious, therefore, that increasing the 
dividend of a stock in an over-capitalized road, when that road is in 
need of working capital, and that in order to pay this dividend it is 
needful somewhat to reduce the standard of maintenance of previous 
years, tends to lower, rather than raise, the price of a stock, even 
though it be the stock of a Vanderbilt road. Although the preferred 
is entitled to 6%, it is doubtful, in view of the earnings in the pros- 
perous years of 1900-1906, if any additional dividend, above the 
4% can be expected ; the circumstances under which the stock was 
raised from 3 to 4%, have already been fully set forth. 

Aside from its value for "control," the Lake Erie & Western 
common apparently finds its chief utility as a stock market plaything. 
This stock never has had, and scarcely seems likely to have, any 
other "value." And yet in the boom years of 1901-2 it was run up on 
the Stock Exchange to $72 per share. This meant manipulation and 
nothing more. The stock sold down to $23 in 1903 and in 1906 was 
lifted to $44. In March, 1907, it sold at $19 per share. There seems 
little likelihood that this stock will earn a dividend for many years 
to come. The road earns, with no great ease, the 4% on its pre- 
ferred, and the preferred is entitled to 6% before the common re- 
ceives any. Inasmuch, therefore, as the control of the road is 
owned outright by the Lake Shore, the common stock outstanding 
has a paper value and little more. 



LAKE SHORE AND MICHIGAN SOUTHERN 

RAILWAY. 

The Lake Shore, as it is commonly known, is the chief sub- 
sidiary road of the New York Central system, and it is likewise the 
principal holding company for the New York Central's interests in 
other lines. Like the Michigan Central, it carries the New York 
Central's traffic westward from Buffalo to Chicago, operating a 
total of 1,520 miles, with 840 miles of second, third and fourth track. 
It has long been a Vanderbilt road, and in 1898 the larger part of 
its stock was exchanged for New York Central collateral 3^ % gold 
bonds at the rate of $200 per share for the capital stock. At the 
last report. $45,267,000 out of $50,000,000 of the share capital had 
been so exchanged, or 90% of the total. The road paid a dividend 
of 10% in 1906, so that the dividend much more than pays the 
interest on the bonds. 

The directorate of the Lake Shore includes eight of the New 
York Central's directors, with the Central's president and senior 
vice-president, W. H. Newman and William C. Brown, and also 
W. K. Vanderbilt, Jr., and W. Seward Webb. The chief operating 
officers of the road are the same. 

Capitalization. 

The stock capital of the Lake Shore has remained unchanged 
since 1871 and nothing has been charged to equipment and construc- 
tion accounts since 1883. In 1906 the Lake Shore paid in rentals 
of leased lines, $1,450,186. Capitalizing this on a 4% basis the 
capital accounts of the road, January 1st, 1907, stood as follows : 

Common stock • • $49,466,500 

Guaranteed stock ( 10% ) 533,500 

Total $50,000,000 

Funded debt . . . • • 135,000,000 

Assumed debt 404,000 

(388) 



LAKE SHORE & MICHIGAN SOUTHERN 389 

Total capital $185,404,000 

Rentals capitalized at 4% 36,254,650 

Approximate gross capitalization $221,658,650 

Securities held 101,597,230 

Approximate net capitalization $120,061,420 

Approximate net capital per mile $78,987 

Average miles operated 1,520 

Net earnings on net capital 12.7% 

Stock on net capitalization 41% 

Fixed charges on total net income 38% 

Factor of safety 62% 



Included in the item of "securities held" was real estate not used 
in operation of the road, valued at $438,661, and advances to lessor 
and other companies amounting to $8,411,403. 

The estimate of $78,987 net capital per mile stands against a 
similar estimate of $123,188 for the New York Central, $42,796 for 
the Michigan Central, $69,150 for the Wabash, and $104,311 for the 
Pittsburg, Cincinnati, Chicago & St. Louis. 

Net earnings for 1906 showed 12.7% on the estimated net 
capital against similar estimates of 5.8% -for the New York Cen- 
tral, 11.4% for the Michigan Central, 3.9% for the Wabash, and 
6.6% for the Panhandle. 

It will be seen that the stock represents 41% on the estimated 
net capitalization and that fixed charges in 1906 consumed 38% 
of the total net income, including in the latter item $5,400,000 
charged to operating expenses for new construction and new equip- 
ment. This stands against a similar estimate of 64% for the New 
York Central, 38% for the Pennsylvania, 38% for the Lackawanna 
and 71% for the Wabash. The Factor of Safety on the underlying 
securities was, therefore, large. 

Equities Owned. 

The Lake Shore is one of the largest railroad holding com- 
panies, owning a controlling interest in the New York, Chicago & 
St. Louis (Nickel Plate), the Cleveland, Cincinnati, Chicago & St 
Louis, the Lake Erie & Western, the Chicago, Indiana & Southern, 
the Pittsburg & Lake Erie, and other small roads. The $30,000,000 
of stock in the Reading road owned by the Lake Shore, with an 
equal amount owned by the Baltimore & Ohio, carries working 



390 LAKE SHORE & MICHIGAN SOUTHERN 

control of the Reading ($60,000,000 out of a total of $140,000,000), 
and the Reading, in turn, has absolute control of the Central of New- 
Jersey. Practical control of the Lehigh Valley is shared with the 
Reading (owning $1,000,000, par value), the Central of New Jersey 
(owning $1,600,000, par value), the Lackawanna and the Erie; and 
the Lake Shore is one of five roads which now control, and under 
the scheme of reorganization will have absolute control, of the Hock- 
ing Valley. The principal items of its holdings stand as follows : 

, , Par Value. 

Chicago, Indiana & Southern, preferred $ 5,000,000 

common 12,000,000 

first mort'gage bonds. 7,000,000 

Cleveland, Cincinnati, Chicago & St. Louis 23,148,100 

Hocking Valley Railway 1,154,000 

Lake Erie & Western, preferred 5,930,000 

common 5,940,000 

Lehigh Valley Railroad Company 5,700,000 

New York, Chicago & St. Louis, 1st preferred 2,500,000 

2nd preferred 6,275,000 

common 6,240,000 

Pittsburgh & Lake Erie Railroad Company 5,000,100 

Reading Company, 1st preferred 6,065,000 

2nd preferrel 14,265,000 

" " common 10,002,500 

The total of $132,213,100, par value of stocks and bonds owned, 
is carried on the books of the company at a cost of $92,747,166. On 
these investments the company received in 1906 $4,153,505, equiva- 
lent to 4.4% on the book valuation. 

The Lake Shore's largest single equity was in the Pittsburgh 
& Lake Erie. In 1906 that extraordinary road earned nominally 
25% on its capital stock and actually 75%, if the sums charged to 
operating expenses for new construction and equipment be added 
to the nominal surplus. Only 11% dividends were paid in 1906, 
leaving a nominal equity of 14% on the capital stock, and actually, 
on the most conservative basis, about 30%. The Lake Shore's equity 
(one-half) in the road's earnings for the year was therefore nom- 
inally $700,000, and, actually, at least two or three times this sum. 

The Reading Company earned in 1906 nearly 14% on its com- 
mon stock and paid 4%. It could easily have paid 6%, which would 
have yielded the Lake Shore $200,000 additional income. 

There were other equities of considerable value in other com- 
panies, so that the actual value of the Lake Shore's holdings were 



LAKE SHORE & MICHIGAN SOUTHERN 



391 



considerably in excess of the amount at which they were carried on 
the books of the company. 

Increase of Capitalization. 

In consequence of large purchases of securities in other lines, 
the Lake Shore, like the Pennsylvania and some other large holding 
companies, shows the anomalous result of having increased its capi- 
tal within recent years much more rapidly than its gross earnings. 
Since 1900 the showing is as follows : 



Year 


Common 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900 


$50,000,000 
50,000,000 


$50,325,000 
135,404,000 


$100,325,000 
185,404,000 


$26,466,513 


1906 


42,544,378 







Increase over six years: Total capital, 85%; gross earnings, 61%. 

In the same period the book value (cost) of the securities 
owned increased from $26,878,782 to $92,747,166, or an increase 
in holdings of about $66,000,000. If this be deducted from the $85- 
000,000 increase in capital, it will be seen that the actual increase 
in the capitalization of the road proper was only about 19%, while 
in the same period the earnings of the road increased 61%. 

It is this result on an already highly profitable road which has 
given such high value to Lake Shore stock. 

In 1906, $35,000,000 of the authorized issue of $50,000,000 4% 
gold bonds were sold, and with this there was purchased $4,395,400 
par value of the stock of the C. C. C. & St. Louis, $1,154,000 par 
value of the Hocking Valley, 16,922 shares of the Merchants Des- 
patch Transportation Company, and $7,000,000 of the bonds of the 
Chicago, Indiana & Southern Railroad. The company also sold 
$5,000,000 par value of stock of the Illinois, Indiana & Iowa Rail- 
road, acquiring in its stead stock of the newly organized Chicago, 
Indiana & Southern. 

Stability and Character of Earnings. 

Nearly three-quarters of the Lake Shore earnings are from 
freight, passenger earnings contributing a little over 20%. Of the 
33,000,000 tons of freight moved in 1906, mine products contributed 
nearly one-half, ore and bituminous coals being the largest items. 
The balance was distributed over a wide variety of traffic. 

The solid and steady growth in the road's earning's are revealed 
in the following table : 



392 



LAKE SHORE & MICHIGAN SOUTHERN 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896 

1897 

1898 


1,440 
1,437 
1,413 
1,413 
1,411 
1,411 
1,411 
1,430 
1,453 
1,520 
1,520 


$20,193,958 
20,297,722 
20,753,683 
23,013,946 
26,466,514 
29,272,675 
30,449,292 
34,768,082 
35,161,053 
38,600,809 
42,544,378 


$14,021 
14,128 
14,715 
16,707 
18,757 
20,746 
21,577 
24,307 
24,198 
25,395 
27,989 


1899 


1900 


1901 


1902 


1903 


1904 


1905 


1906 



The Lake Shore's average freight earnings of .52c. per ton mile 
in 1906 were rather low, but the average load per train mile was high 
— 624 tons of revenue freight — so that the earnings per train mile 
amounted to $3.25. 

Maintenance. 

For years the Lake Shore's operating expenses have been heav- 
ily charged for improvements, but this fact has been especially 
notable from 1903, as the following table discloses : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900 


2,566,144 
2,839,506 
2,872,786 
3,224,272 
3,160,358 
3,355,209 
3,698,357 


$2,197 
2,404 
4,256 
5,515 
4,172 
5,337 
6,278 


$2,874 
4,184 
2,913 
3,688 
4,898 
5,464 
4,634 


$5,071 


1901 


6,588 


1902 


7,169 


1903 


9,203 


1904 


9,070 


1905 


10,801 


1906 


10,912 






Average. . . . 


3,102,376 


$4,308 


$4,093 


$8,401 


Panhandle. . . . 

Penn. Co 

Erie 


2,193,454 
3,246,341 
2,434,819 


2,567 
3,314 
1,861 


3,680 
4,139 
3,216 


6,247 
7,453 
5,077 







Miles of extra track. 840. 

The amounts given above are the total expenditures for mainten- 
ance and improvements. Beginning with 1905 the improvement 
items were separately entered, and for a basis of comparison with 
other roads which charge off expenditures separately, the expendi- 
tures for bare maintenance are given below for two years : 





Traffic Density 


Way 


Equipment 


Total 


1905 


3,355,209 
3,698,357 


$2,875 
3,501 


$o,Z5o 
3,844 


$6,128 


1906 


7,345 







LAKE SHORE & MICHIGAN SOUTHERN 
Improvements from Earnings. 



393 



Included in the sums devoted to maintenance, from which the 
mileage average in the first table has been made up, were the follow- 
ing sums charged to operating expenses for new construction and 
new equipment : 

1900 $3,071,999 

1901 4,186,143 

1902 4,192,461 

1903 6,315,276 

1904 5,557,236 

1905 6,720,793 

1906 5,423,722 



$35,467,630 



This is an average of $23,333 per mile for the road as operated 
in 1906 and stands against similar appropriations, for example, of 
$17,217 per mile for the Pennsylvania for eight years, and $42,885 
per mile for the Lackawanna for six years. 

Surplus Earnings. 

In the following table the surplus shown is after charging out 
the improvements noted in the table above; that is, the items show 
the nominal surplus given in the reports. The items compare as 
follows : 



Year 



1900 
1901 
1902 
1903 
1904 
1905 
1906 



Surplus 



Per cent. 

Earned on 

Common 



56,658,431 
7,155,125 
6,735,523 
4,471,032 
4,457,741 
4,467,964 
6,486,612 



13.3 

14.2 

13.4 

8.9 

8.9 

8.9 

12.9 



Dividends 
Paid on 
Common 



8 

8 
8 
8 
8 
8 
10 



Average 
Price 



218 
272 
333 
293 
267 
319 
317 



It will be seen that as a result of heavy charges for improve 
ments the surplus after 1901 showed a decrease in the face of a large 
increase in earnings. The actual surplus obtained by adding in the 
amount shown in the table above and the amounts expended for 
improvements for four years have been as follows : 



394 LAKE SHORE & MICHIGAN SOUTHERN 

1903 $10,786,308 

1904 10,015,975 

1905 11,571,756 

1906 11,909,354 

Thus it will be seen that while the nominal surplus for 1906 
showed only 12.9% on the capital stock, the actual surplus earnings 
of the road were around 23.8%. 

Dividend Payments. 

The following table shows the dividend payments over a series 
of years : 

% 
1871-2 8 

1873 4 

1874 3% 

1875 2 

1876 3% 

1877 2 

1878 4 

1879 6Y 2 

1880-3 8 

1884 7 

1885-6 — 

1887-8 4 

1889-90 5 

1891-2 6y 2 

1893-7 6 

1898 6y 2 

1899-03 7 

1904-5 8 

1906 10 

In December, 1906, the stock was put on a 12% basis. 

The Balance Sheet. 

As of June 30th, 1906, the balance sheet showed : 

Current assets of $18,223,457 

Current liabilities of 11,342,528 

Leaving a working balance of $ 6,880,929 

The item of cash on hand was $4,938,938, and the balance to 
credit of profit and loss was $17,298,529, 



LAKE SHORE & MICHIGAN SOUTHERN 395 

Investment Value. 

Only a very small amount of Lake Shore stock is outstanding 
and sales are rare. In 1906 only two quotations are shown, for $300 
and $335 per share. On a 12% basis, at the latter figure the stock 
yields 3.5% flat. If the total surplus for 1906 were divided equally 
between improvements and dividends, somewhat after the Penn- 
sylvania fashion, this would have left 11% for the stock, so that at 
tfie quotations given above, the stock does not represent anything 
very attractive to the investor, for while the Lake Shore is undoubt- 
edly a magnificent property, its solidity for the investor is discounted 
by the value put upon its stock. 



LEHIGH VALLEY RAILROAD. 

The Lehigh Valley is one of the big "coalers," like the Reading 
and the Lackawanna, owning vast fields of anthracite coal, and 
whose chief business is getting this coal to market. 

About 85% of its coal traffic originates from properties owned or 
controlled by the company itself. It operates a double track line of 
railroad from New York through the anthracite coal fields of Penn- 
sylvania, to Buffalo, with numerous branches. 

The Lehigh Valley was organized as a Pennsylvania company 
as far back as 1847. Its main line was completed in 1855. The 
Easton & Amboy Railroad, in New Jersey, now operated as a part 
of the main line, was opened in 1875. 

In 1892 the Lehigh Valley was leased to the Reading for 999 
years. This lease was broken the following year. The depression 
of 1893-7 was severely felt by the Lehigh, with the result of the 
entire suspension of its dividends for nine years from 1894. In 1897 
a general readjustment of its finances was arranged by J. P. Morgan 
& Co., though the line did not pass into the hands of a receiver, and 
its capital stock remained unchanged. 

The company owns outright, or through ownership of the 
entire capital stock, 1,210 miles, and has leases and trackage rights 
which bring up the total average mileage operated to 1, 429 miles. 

The road has 577 miles of second track, and 40 miles of third 
track, which means that 40% of the mileage is double track. This 
includes the entire line from New York to Buffalo. 

Ownership. 

Between 1899 and 1901 J. P. Morgan & Co. purchased the hold- 
ings of the Asa Packer estate, amounting to 150,000 shares, equiva- 
lent to $7,500,000 par value of the stock. This purchase, with other 
acquisitions, gives practical control of the road, and this control was 
in 1901 partitioned between the Lake Shore, the Erie, the Reading, 
and the Central of New Jersey. 

The 1906 report of the Lake Shore shows holdings of $5,700,- 
000 par value in the Lehigh Valley road, $3,200,000 of this having 

(396) 



LEHIGH VALLEY 397 

been purchased at $30 per share in the transfer of 1901. At the last 
reports, the Reading Company owned $1,000,000 par value of Lehigh 
Valley stock, and the Central of New Jersey $1,600,000. The 
amount of stock held by competing roads constitutes practical work- 
ing control, since the stock is rather widely distributed, like the Penn- 
sylvania's, though in lesser degree. 

In 1905 the road reported 5,775 shareholders, a large figure for 
so small a stock interest. 

The majority of the directorate is made up of representatives 
of the New York Central, Erie, and Reading roads. These include 
H. McK. Twombly and George F. Baker, representing the New York 
Central-Lake Shore ; George F. Baer, president of the Reading and 
the Central of New Jersey, and Edward T. Stotesbury, a director of 
and representing the Reading ; Charles Steele, representing the Mor- 
gan interests, also a director of the Erie, Reading, Hocking Valley 
and other roads. The other directors are Irving A. Stearns, New 
York, president of Coxe Bros. & Co. Coal Company, and of the Dela- 
ware, 'Susquehanna & Schuylkill Railroad, up to their absorption by 
the Lehigh in 1905 ; Joseph Wharton, New York, president of the 
Rossie Iron Company; Edward B. Smith, New York, director of the 
American Gas Company and other enterprises ; Robert C. Lippincott, 
George H. McFadden, Abraham Nesbitt and Simon P. Wolverton. 
E. B. Thomas, former president of the Erie, is the president. 

Capitalization. 

On June 30th, 1906, the capital account stood as follows : 

Common stock $ 40,334,800 

Preferred stock (10%) 106,300 

Total stock $ 40,441,100 

Net funded debt (including leased lines) 124,213,300 

Total capital $ 164,654,400 

Securities held 80,481,775 

Approximate net capital $84,172,625 

Approximate net capital, per mile $58,896 

Average miles operated 1,429 

Net earnings on net capitalization 14.7% 

Stock on net capitalization 49% 

Fixed charges on total net income 46% 

Factor of safety 54% 



398 LEHIGH VALLEY 

The Lehigh reports itemize the indebtedness of leased and 
underlying roads, so that it has been possible to state the capitali- 
zation of the road without recourse to estimates. It will be seen 
that the underlying securities added $45,000,000 to the ordinary 
bonded indebtedness of the road. From the combined sum, $2,000,- 
000 of bonds held by the company have been deducted. Against 
this indebtedness the Lehigh Valley holds in its treasury securities 
to about $80,000,000. 

Company of New Jersey, $7,927,000 more, bringing the total up 
to over $80,000,000. 

When this is deducted from the gross capitalization, the net 
capitalization amounts to only $58,896 per mile. This for a double 
track road of the character and resources of the Lehigh Valley is 
extraordinary low. It compares with estimates of $132,789 for the 
Lackawanna, about $145,000 for the Pennsylvania, and with $161,- 
742 for the Reading. 

That this is no legerdemain of bookkeeping is evidenced by the 
percentage which the net earnings show on this estimate* of net 
capitalization, amounting to 15.5%. This compares with 13.7% for 
the Lackawanna, 8.1% for the Pennsylvania, and 10.8% for the 
Reading. It exceeds even the high figure of the Lake Shore, which 
was 12.7%. 

Equities Owned. 

The total book value of the securities owned by the Lehigh 
amounts to $72,554,775, and if we add in the 79,270 shares of the 
Coxe Brothers & Co., Incorporated, owned by the subsidiary Lehigh 
Valley Railroad of New Jersey, and carried on the books of that 
company at $100 per $50 share, the total amounts to $80,481,775. 

By far the larger part of these securities, however, yield the 
company no interest. The chief items in this regard are stock in 
the Lehigh Valley Company of New York, at par value, $11,200,000, 
and of the Lehigh Valley Company of New Jersey, $20,433,000, 
together with the stocks of the various water lines included in the 
Lehigh Valley system, and carried on the books at a valuation 
of $28,834,228. The items for other companies are small. 

Besides this there are bonds of these subsidiary companies of a 
value of $5,572,926. 

The stocks of allied coal companies are carried on the books 
at $19,008,211. The larger part of these is represented by the pur- 
chase of the Coxe Brothers & Co. Coal Company properties, for 
the purchase of which $19,000,000 of collateral trust bonds were 



LEHIGH VALLEY 399 

issued. The report states that "such of the net current assets of 
the companies purchased as were not required in the conduct of the 
business have been liquidated, and credited on the books as a reserve 
for the depreciation of those properties." On the balance sheet this 
item of reserve amounts to $2,209,360. 

The Coxe Brothers property was taken over late in 1905, and 
presumably because a full year of their operation had not been com- 
pleted no statement as to results from this company is given, beyond 
the remark that "the net results to your company from the operation 
of these properties since the date acquired, notwithstanding the sus- 
pension of mining for practically two months, have been sufficient 
to pay the interest on the bonds issued for the purchase thereof, 
and provide a substantial amount which may be applied to the 
retirement of the same." 

The requirements for this latter item amount to one million 
dollars a year, but the report does not state as to whether this full 
amount had been earned. If it can be, the result of this sinking fund 
will be to give the properties over to the company free of charge 
at the end of nineteen years or perhaps less. 

No returns from this source are included in the income from 
investments, and the actual income from investments amounted for 
the year to a little over half a million dollars. This was exclusive of 
the $318,489 of net income from the operations of the Lehigh Valley 
Coal Company. 

The company owns the entire amount of outstanding stock of 
the Coal Company, and the net income from this source for several 
years ranged between $600,000 and $800,000. The reduction in the 
net income for the year of 1906 was due in part to the strike. Over 
and above the surplus reported in 1906 the coal company set aside 
from its net income, $250,000 to the improvement fund. 

Coal Holdings. 

At the latest estimates the entire coal holdings of the Lehigh 
Valley Railroad are set down at 22,720 acres, containing an estimated 
amount of unmined coal of 400,000,000 tons. Inasmuch as the 
anthracite coal fields are extremely limited, this is obviously of 
enormous value, but it would be quite impossible to give these coal 
fields a cash valuation for selling purposes. If this coal could be 
mined at a net profit of thirty cents a ton, such as the reports of the 
Reading or the Delaware & Hudson Company show, a cash valu- 
ation at 10c. per ton would hardly he excessive. At this figure the 
Lehigh's holdings would represent a matter of $40,000,000, or 



400 



LEHIGH VALLEY 



sufficient to wipe out one-third of the funded debt of the company. 

The actual amount of income to the railroad averaged through 
several years about $700,000 per annum. If the surplus from the 
Coxe Brothers' property were sufficient to meet the sinking fund 
payments on the collateral trust bonds, this amount might legiti- 
mately be added to the estimated net revenue of the railroad. The 
reports of the company for 1907 will make clear the total revenue 
that may be expected from the Lehigh's present holdings. 

But it is obvious that the direct income from the railroad prop- 
ties represents only part of the profit of these holdings to the road. 
The freight earnings from coal traffic alone amounted in 1905-6 to 
over $13,000,000 per year, or more than 40% of the gross earnings 
of the company, and as already stated, 85% of this traffic came from 
properties owned or controlled by the railroad. 

Increase of Capitalization. 

In six years the increase of capitalization shows as follows : 



Year 


Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1899-00 


$40,441,100 
40,441,100 


$102,473,000 
124,213,300 


$142,914,100 
164,654,400 


$23,049,282 


1905-6 


32,789,856 







Increase over six years: Nominal capital, 15% ; gross earnings, 
42%. 

In the above estimates, the bonds of the Lehigh Valley Coal 
Company have been excluded, since through the sinking fund 
operations, these bonds will ultimately be extinguished. The item 
of funded debt does include, however, the company's bonds held 
in its own treasury, in both instances. It will be seen that the 
increase in gross earnings was largely in excess of the increase 
in the nominal capital. 

Character of Traffic. 

Of the Lehigh's gross income, amounting to nearly thirty-three 
million dollars, less than four millions, or only about 12%, is derived 
from passenger earnings. The baance comes from its freight 
traffic, in the main, and in this traffic coal and coke represent an even 
half. Apparently, the rates for coal and other traffic are about the 
same, for the gross earnings from the two sources are nearly equal. 

The company does, not further itemize its merchandise traffic. 
In the following tabulation it is shown that the growth in coal 



LEHIGH VALLEY 



401 



traffic has slightly exceeded the growth of merchandise traffic, 
while the passenger business has remained at a standstill. 



Year 


Total Freight 
Tons 


Coal 
Tons 


Merchandise 
Tons 


Number 
Passengers 


1906 

1905 


25,568,251 
23,774,287 
21,909,097 
19,920,132 
18,174,886 
18,511,063 
17,430,470 
17,663,010 


12,753,053 
12,518,369 
11,694,151 
9,424,218 
8,923,446 
9,679,564 
8,875,220 
9,195,964 


12,815,198 

11,255,918 

10,214,946 

10,495,914 

9,251,440 

8,831,499 

8,555,250 

8,467,046 


4,989,989 
4,535,232 


1904 


4,199,490 


1903 

1902 


4,148,477 
4,308,497 


1901 


4,756,732 


1900 


4,717,849 


1899 


4,604,932 







Stability of Earnings. 

Through ten years the earnings of the road have very heavily 
increased, the average earnings per mile having risen from $14,297 
in 1896-7 to $22,946 in 1905-6, an increase of 60%. 

The items were as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896-7 


1,368 
1,394 
1,396 
1,381 
1,400 
1,387 
1,392 
1,392 
1,394 
1,429 


$19,559,167 
19,742,538 
21,570,502 
23,049,282 
26,683,534 
24,272,252 
26,654,503 
29,881,738 
31,275,843 
32,789,856 


$14,297 


1897-8 


14,162 


1898-9 


15,451 


1899-0 


16,690 


1900-1 


19,059, 


1901-2 


17,500 


1902-3 


19,149 


1903-4 


21,467 


1904-5 


22,436 


1905-6 


22,946 







This large increase has considerably exceeded the actual in- 
crease of business, or tonnage, and is due in large part to the in- 
crease of rates which followed the introduction of the community of 
interest scheme. Thus, in 1899 the average freight rate per ton 
mile was .52 cents and in 1906 .62 cents, an increase of a full mill per 
mile, or about 20%. On the total traffic of the Lehigh for 1906, this 
would have represented a difference of $4,342,000, or more than half 
the surplus shown. It will be seen, therefore, that, like other roads 
which have similarly benefited, the Lehigh Valley is very keenly 
interested in the maintenance of the present arrangements. 

Maintenance. 

For years the operating expenses of the Lehigh Valley have 
been very heavily charged for the improvement of the road. This 
was especially true from 1900 to 1903. It will be seen from the table 
that in 1902 the maintenance charges amounted to $7,000 per mile. 
26 > 



402 



LEHIGH VALLEY 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


2,464,949 
2,609,541 
2,797,865 
2,948,115 
3,038,762 


$3,340 
2,880 
2,197 
2,345 
2,206 


$3,713 
3,374 
3,408 
3,511 
3,838 


$7,053 
6,254 
5,605 
5,856 
6,044 


Average 


2,771,846 


$2,588 


$3,429 


$6,017 


N. Y. C 

Lackawanna . . 
Erie 


2,070,251 
3,079,629 
2,434,819 


$2,722 
4,754 
1,861 


$3,033 
3,579 
3,216 


$5,755 
8,333 
5,077 



The reduction which the table shows from the level of 1902 is 
only apparent, since in the following year a change was made in the 
method of bookkeeping, whereby a separate charge was made from 
net income for extraordinary expenditures. The amounts which 
were set aside in the four succeeding years are as follows : 

1902-3 $1,266,182 

1903-4 1,465,290 

1904-5 1,411,551 

1905-6 - 1,570,227 



Total $5,713,250 

The charges for equipment for 1906 amounted to $3,000 per 
locomotive, $695 per passenger car, and $61 per freight car. These 
are very heavy charges, and probably amounted to an excess of one 
million dollars over what might have been necessary had the road, 
through adverse circumstances, been compelled to run on an eco- 
nomical basis. In estimating the earning power of the road, this 
sum might be added to the amount set aside for improvements. 

Surplus Earnings. 

Owing to the heavy charges for improvements, the Lehigh Val- 
ley showed a large deficit in 1900 and again in 1902. The abrupt 
change from the latter year to 1903 was due in part to the change 
in bookkeeping methods, for the apparent surplus shown includes 
the $1,266,182 set aside for special improvements, as do also the 
amounts for subsequent years. For the rest, the change from a 
deficit to a large surplus is due in part to the reduction in the main- 
tenance charges, and in part to the increased economies in operation 
brought about by the heavy improvements of the preceding years. 
The following shows the separate items : 



LEHIGH VALLEY 



403 







Dividends 


Per cent. 


Dividends 


Average 


Year 


Surplus 


on Preferred 


Earned on 


Paid on 


Price 






10% 


Common 


Common 


($50 share) 


1899-0.... 


*$2,077,796 


— 


... 


— 


26 


1900-1.... 


574,612 


. . 


1.3 


— 


34 


1901-2. . . . 


* 1,332,776 


. . 


... 


— 


34 


1902-3.... 


3,273,689 


. . 


8. 


— 


40 


1903-4. . . . 


6,577,287 




11.3 


1 


46 


1904-5.... 


7,439,987 


10 


18.4 


4 


71 


1905-6.... 


7,340,299 


10 


18.3 


4 


75 



Even if the $1,570,000 devoted to improvements in 1906 were 
deducted from the surplus shown in the table, the road would still 
have earned nearly 15% on its capital stock. If, on the other hand, 
the surplus were estimated on the same basis as that adopted by 
many less prosperous lines, the actual earnings could be shown to 
be far in excess of this. There was, for example, the item of 
$250,000 set aside from the coal companies' surplus for improve- 
ments, and if we estimate the excess of maintenance at one mil- 
lion dollars, and the possible surplus earnings from the operation 
of the Coxe Brothers properties at another million dollars (and 
include the appropriations for improvements on the railroad), this 
would bring up the surplus earnings to above nine and a half mil- 
lion dollars. This would represent more than 23% earned on the 
capital stock. This is a fine showing, and while a full half of it is 
due to improvement in freight rates over the low levels of 1899, it 
reveals the exceeding prosperity of the company. 

Dividend Record. 
For a long period anterior to the dull years of 1893-7, high divi- 
dends were paid. They declined gradually from 10% in 1871-5 to 
4% in 1893. Thereafter no dividends were paid on the common 
stock for eleven years, and even the dividend on the small amount of 
preferred was suspended. The full record is as follows : 



1871-5 

1876 

1877 

1878-80 

1881 

1882 

1883-4 8 

1885 6 

1886 4 



% 
10 

9 

4 

5/ 

6/ 



404 LEHIGH VALLEY 

1887 4J4 

1888-91 5 

1892 sy A 

1893 4 

1894-03 none 

1904 1 

1905 4 

1906 4% and 1% extra 

1907 4% and 2% extra 

Balance Sheet. 

At the close of the fiscal year of 1906, the books of the company 

showed current assets to the amount of. $17,700,701 

and current liabilities 4,697,944 

leaving a working balance of $13,002,757 

Of the items of current assets, cash amounted to $11,676,966, 

showing that the company was in ample funds, and had at the time 

a handsome working balance. 

The amount to the credit of profit and loss was $11,380,815. 
This, however, was the amount before the payment of the 

semi-annual dividend ($812,000), due a few days after. 

Investment Value. 

The Lehigh Valley was one of the roads which suffered severely 
through the freight wars which played so large a part in railroad 
operations in former years, and in the long depression of 1893-7 its 
stock went down to a low figure. As with the Pennsylvania and the 
Reading, its stock is in $50 shares, and in 1897 it could have been 
bought for as low as $20 per share, and even as late as 1900 for $22 
per share. From this low point the stock rose steadily, correspond- 
ing with improved conditions of the road's finances, to $39 per share 
in 1901 and to $45 per share at the beginning of 1903. In the decline 
that followed, the stock went down only to $35 in 1904, and had risen 
to $60 in the same year. In 1905 it sold up to $90 a share, and in 
1906 to $86. This was equivalent on the New York basis to quota- 
tions respectively of 180 and 172. In the general decline of March, 
1907, it fell to 115. 

These quotations are those of the Philadelphia exchange, where 
the stock is actively dealt in. 

The 1906 prices for a 4% stock were extremely high and obvi- 



LEHIGH VALLEY 405 

ously based not upon dividend payments, but upon the high earn- 
ings of the road. The amount of common stock is only $40,000,000, 
so that its 4% dividend calls for only $1,600,000. This on a net sur- 
plus over and above appropriations for improvements of $5,770,000, 
leaves a wide margin for a largely increased dividend. It is obvious, 
for example, that on the basis of the surplus shown, in 1906, and 
that of the two preceding years, its 4% disbursement might readily 
have been doubled. 

At the average price of 150 ($75 per share), shown for the 
calendar year of 1905, the stock yielded only 2.6% on the investment. 
At the lowest price of 1906 ($65) it yielded 3%. That the dividend 
will be increased either by continued extra dividends or regularly, is 
practically assured. But if the conservative policy of the road be 
maintained, it is scarcely likely that this increase will bring the 
dividend above 6 or 7%, though as already indicated, 8% would 
be easily justified. With the immense coal holdings of the company, 
its excellent management, and its highly prosperous condition, 
on a 7% basis, the stock might sell again at the high figure 
of 1905; that is, above $90 per $50 share. On this basis a 7% 
dividend would yield nearly 4% to the investor, with every prospect 
of a still further increase in the dividend, and a corresponding 
increase in price, should business conditions meet with no heavy 
setback. 

It is evident from the high prices which the stock has shown 
that these anticipations have been pretty fully discounted. At the 
high figures of 1905-6 the stock had small speculative attractions. 
Even at $65 per share the price is clearly a speculation on the future 
dividend policy of the company. The surplus shown in the last two 
or three years under view show, however, that such a speculation 
was as safe a probability as a speculation well could be. Purchased 
at anything like these figures the stock would undoubtedly yield a 
handsome return in increased price, if put away in the investor's 
strong box. 

A purchase at higher than these figures would be either a pure 
gamble, or based upon that foreknowledge of directors' intentions 
which is so dubious an element in stock manipulation. 



LONG ISLAND RAILROAD. 

The Long Island Railroad comprises a network of lines which 
cover Long Island, and the road enjoys a monopoly of its territory 
like that of no other railroad in the east, and comparable only to some 
of the lines in the sparsely settled territory of the west. It has 
practically no competitor, save the Brooklyn Rapid Transit, with 
which it has a fifty-year traffic agreement. Since 1900 it has been a 
part of the Pennsylvania system, and with the completion of the 
East River tunnels, will be a connecting link in a close traffic 
arrangement between the Pennsylvania and the New Haven Rail- 
road. 

The line is an old one, having been chartered in 1834, and 
opened in 1844, from Jamaica to Greenport. Other lines have been 
added by consolidation and otherwise, so that in 1906 it operated 392 
miles of main track. It also operates an extensive ferry service 
between Manhattan and Long Island. 

Aside from the Pennsylvania tunnels on Thirty-fourth street, 
the extension of the Interborough subway will connect with the 
road at Flatbush avenue and the Belmont tunnel now under con- 
struction from Forty-second street. These tunnels, when completed, 
will undoubtedly cause a heavy increase in the business of the road. 

Ownership. 

In May, 1900, the Pennsylvania Company purchased $6,797,000 
par value of the $12,000,000 stock of the road, and since that time 
the road has been operated under Pennsylvania auspices. Aside 
from Pennsylvania representatives the directorate of 1906 included 
August Belmont, banker ; Dumont Clarke, president of the American 
Exchange National Bank ; W. G. Oakman, former president of the 
Guaranty Trust Company; C. M. Pratt, secretary of the Standard 
Oil Company, Franklin B. Lord, and the president, Ralph Peters. 

In 1898 a contract was entered into with the Brooklyn Elevated 
Railway, now controlled by the Brooklyn Rapid Transit, for a con- 
nection between the two systems. The Long Island Road also 
controls the Prospect Park & Coney Island road, now leased to a 
subsidiary company of the Brooklyn Rapid Transit, and it also 

(406) 



LONG ISLAND 407 

controls the Montauk Steamboat Company, which operates a line 
of boats between New York City and North Shore Point. It owns 
also a number of trolley lines on the island. 

Capitalization. 

The capital account, on January 1st, 1907, stood as follows: 

Capital stock $12,000,000 

Funded debt 44,079,790 

Leasehold estates 3,888,000 

Total capital $59,967,790 

Rentals capitalized at 4% 10,448,775 

Approximate gross capitalization $70,416,560 

Securities held 11,818,301 

Approximate net capitalization $58,598,264 

Approximate net capital per mile $149,317 

Average miles operated 392 

Net earnings on net capital 3.5% 

Stock on net capitalization 20% 

Fixed charges on total net income 101% 

As shown above, the capital account does not include the 
amount of the equipment trust outstanding, which was not given 
in the report of 1906. Through this equipment trust there was 
added during the year 2 ferry boats, 2 car floats, 25 locomotives, 100 
box cars and 34 gondola cars, or roughly about $500,000 of new 
equipment. 

It will be seen that the capitalization per mile is very high; 
even the bonded debt of the road is above $120,000 per mile. The 
estimated net capitalization of $149,317 per mile, with earnings of 
$24,488 per mile, stands against $103,741 per mile for the New 
Haven, and is higher than that of the New York Central. This 
load of debt is a heritage from the old Austin Corbin regime. The 
net earnings of 1906 on the estimated net capital represented 3.6%, 
a rather low figure, but the operating expenses of the road have 
been systematically surcharged since the advent of the Pennsyl- 
vania management, so that the figure has less significance than it 
might otherwise possess. 

The stock represents 20% of the net capitalization, and in 
1906 fixed charges consumed slightly more than the total net income, 



408 



LONG ISLAND 



In other words, the operating expenses were adjusted so as to just 
about pay the fixed charges. 

Increase of Capitalization. 

Since the advent of the Pennsylvania management the funded 
debt of the road has been increased by $21,809,000, equivalent to 
$55,635 per mile of road operated. In the same period, however, 
the gross earnings have increased $12,893 per mile. The increase 
in the nominal capital was equivalent to 58%, while the gross earn- 
ings increased 113%. The items compare as follows: 



Year 


Common 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1899-0 


$12,000,000 
12,000,000 


$26,158,702 
47,967,790 


$38,158,702 
59,967,790 


$4,557,259 


1906 


9,595,596 







Character of Traffic. 

The Long Island road is exceptional from the fact that its 
earnings from passenger traffic were in 1906 more than double its 
earnings from freight traffic, and passenger earnings contributed 
about 60% to the gross earnings of the road. Likewise the express 
traffic was exceptionally heavy, contributing in 1906 nearly 12% of 
the gross. 

Stability of Earnings. 

In the ten years preceding the advent of the Pennsylvania 
management, the earnings of the road were practically stationary, 
fluctuating around $4,000,000 annually. They have risen steadily 
in seven and a half years from $11,595 per mile in 1900 to $24,488 in 
1906. That is to say, more than double. In the table below the gross 
for 1905 and for 1906 includes the gross earnings of the river and 
harbor service, not previously included in gross income and not so 
shown in the original report of 1905. 



Year 



1896... 
1897... 
1898... 
1899... 
1900... 
1900-1. 
1901-2. 
1902-3. 
1904. . . 
1905... 
1906... 



Miles Operated 


Gross Earnings 


383 


$3,962,799 


398 


3,954,866 


403 


4,333,194 


403 


4,622,475 


393 


4,557,259 


380 


4,862 347 


395 


5,883,607 


391 


6,440,992 


391 


7,083,807 


391 


8,501,466* 


392 


9,595,596* 



Per Mile 



$10,347 
9,936 
10,752 
11,470 
11,595 
12,795 
14,858 
16,473 
18,117 
21,687* 
24,488* 



* Includes River & Harbor Co. earnings. 



LONG ISLAND 



409 



The increase of freight mileage in 1906 was small, amounting 
to only 5%, while the increase in passenger mileage was 22%. 

Maintenance. 

With the Pennsylvania's purchase of the control of the road, it 
immediately began a broad system of improvements which have 
included heavy charges to maintenance account. As will be seen 
from the table below, maintenance of way per mile of operated road 
has increased from $1,624 to $2,694, or $1,070 per mile, equivalent 
to above 60%. 

Maintenance of equipment has increased from $1,229 to $2,995, 
or $1,766, equivalent to 144%. In the meantime freight traffic 
density increased about 67% and the passenger traffic density 62%. 
These items compare as follows : 



Year 


Traffic 


Density 


Maintenan< 


le per Mile 


Total 


Freight 


Passenger 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904 

1905 

1906 


111,287 
128,434 
142,101 
145,708 
149,857 
176,820 
185,774 


523,141 

607,787 
644,851 
675,771 
698,986 
700,389 
854,494 


$1,624 
1,795 
1,882 
2,197 
2,013 
2,113 
2,694 


$1,229 
1,351 
1,515 
3,408 
1,819 
2,594 
2,995 


$^&,o53 
3,146 
3,397 
5,605 
3,832 

5,689 


Average . . . 


148,568 


672,202 


$2,045 


$2,130 


$4,175 



These figures indicate a considerable surcharge, but the amount 
of this surcharge is difficult to estimate, owing to the peculiar char- 
acter of the traffic and equipment of the road. The locomotive 
repairs amounted to 8c per engine mile, which compares with 9.4c 
per engine mile for the Pennsylvania, as a whole. But the locomo- 
tive equipment of the Long Island road is, of course, much lighter 
than that of the Pennsylvania. 

The operating ratio for 1906 was 78% — practically the same 
figure as the preceding year. 

If the surcharge amounted to as much as 5%, this would be 
equivalent to $480,000, which would represent nearly $1,200 per mile 
of excess maintenance, and this would be equivalent to nearly 4% 
on the outstanding capital stock. 

The road is, however, in a transition period and obviously pre- 
paring for a heavy increase of traffic as soon as f-he tunnels under 
the East River are completed and the Long Island has through rail 
connections with the Pennsylvania. 



410 LONG ISLAND 

Surplus Earnings. 

Under these heavy charges for maintenance the surplus has 
shown as follows since 1901 : 



Year 


Surplus 


Per cent. 

Earned on 

Common % 


Dividends 

Paid on 

Common 


Average 
Price 


1900-1 


$206,164 

544,255 

305,588 

(Def.) 275,205 

22,529 

(Def.) 28,358 


1.7 
4.5 
2.5 


None 


71 


1901-2 


80 


1902-3 


76 


1903-4 


54 


1905 


61 


1906 









The Long Island has paid no dividends since 1897. From 1883 
to 1890 it paid 4% yearly, in 1891 4^%, in 1892-3 5%, in 1894 
4y 2 % and in 1895-6 4%. 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet showed: 



Current Assets (excluding materials on hand) 
Current Liabilities 



$4,342,087 
2,530,904 



Leaving a working balance of $1,811,183 

The item of current assets included about $2,670,000 of advances 
to other companies, which were scarcely a quick asset. 

The item of cash amounted to $365,369 and the profit and loss 
account showed a debit of $1,747,236, an increase for the year of 
$208,037. 

Investment Value. 

For the ten years since 1897 an investment in the Long Island 
stock would have shown no returns whatever, and it is not improb- 
able that this situation will continue for two or three years longer. 
Should the tunnels be completed at the close of 1908, the year of 1909 
should show a heavy increase of earnings, and under reasonable 
conditions might yield a fair return on the stock. 

The stock is attractive, therefore, only for a long pull. It has 
varied between a low point of 48 in 1904 to 81 in 1906. In the 
stock boom of 1901 it was run up to 90, and to 91 in 1902. If it 
should pay 4% in 1909, it could reasonably be expected to go to par. 
The return which an investor would receive, therefore, could be 
measured by the difference betwen this price and what he paid for it, 
divided by three or four. Should the earnings of the road meet 
expectations, the dividend in a few years might be even higher, 
but this is pure speculation. On a speculative investment there are 



LONG ISLAND 411 

few who would be satisfied with a return of less than 15% per 
annum, and supposing, therefore, that the stock should reach par 
within three years, it might be considered as worth some- 
where around 50. Bought at this figure or lower, it should return 
within three or four years a satisfactory interest to its purchasers. 
It sold at $52 per share in March of 1907. 



LOUISVILLE AND NASHVILLE RAILROAD. 

The Louisville & Nashville, although now owned and controlled 
by the Atlantic Coast Line, is operated separately, and its total 
mileage owned and controlled is much larger than the Atlantic Coasf 
Line. It is one of the oldest and has long been one of the leading 
systems of the southern states. In 1906 it directly operated 4,205 
miles of road, and controlled through stock ownership or jointly 
with other roads, 2,366 miles more, which, with the lines operated 
by its subsidiary companies, brought the total up to 6,842 miles. Its 
lines form a perfect network southward from Cincinnati and Louis- 
ville to Pensacola and New Orleans, covering the rich iron districts 
about Birmingham, and with branches extending to Memphis and to 
St. Louis. Jointly with the Southern Railway it owns a large part 
of the stock of the "Monon" (Cincinnati, Indianapolis & Louisville), 
and with the Atlantic Coast Line it jointly owns the Georgia Rail- 
road, and its subsidiary, the Atlantic & Western. The road has long 
been characterized by admirable management, and in spite of con- 
siderable difficulties managed to keep its feet through the depression 
of 1873-7, and again of 1893-7. Since the latter period, it has shown 
a high degree of prosperity. 

History. 

The Louisville & Nashville dates from 1850, when a line from 
Louisville, the "Tobacco capital" of Kentucky, to Nashville, was 
projected. The line was opened in 1859, and despite the troubles 
of the war, the company was able to declare its first cash dividend 
in 1863, and continued to pay excellent returns until 1873. About 
1870 it began a policy of extension which in the ensuing crisis 
brought anxious times to the management. It recovered, however, 
and by 1880 it became so prosperous that it declared a script dividend 
of 100%, and even on its doubled capital in 1881, was able to pay 
6% dividends. The failure of its president, Mr. Baldwin, in 1884, 
shook confidence in the road, but it again pulled through, and by 
1890 it was directly operating 2,858 miles of road, with an interest 
in about 2,000 miles more. In 1902 a controlling interest in the. 

(412) 



LOUISVILLE & NASHVILLE 413 

Atlanta, Knoxville & Northern was purchased and in due course this 
was absorbed into the main system. In the same year, in company 
with the Southern Railway, it purchased a large interest in the 
"Monon," which gave to these roads a joint outlet to Chicago. The 
absorption of a number of small lines has brought up the road to its 
present mileage. The most important of its subsidiary companies is 
the Nashville, Chattanooga & St. Louis, operated separately, which 
controls about 1,270 miles of road. The Louisville & Nashville is 
also the joint lessee with the Atlantic Coast Line of the Georgia 
Railroad and its dependencies, operating 571 miles. 

Ownership. 

The transfer of the control of the system in 1902 was one of 
the most dramatic incidents in recent railway finance. The road up 
to that time had been owned largely in England, and in particular 
the Rothschilds were reputed to be heavily interested. The story 
as told by Moody's Magazine, a journal of repute, is that the 
directors of the road had decided upon a new issue of $5,000,000 
stock to be offered at par. As no rights accrued from the subscrip- 
tions, the effect of the new issue would be, other things being equal, 
to depress somewhat the market price of the stock, and in antici- 
pation of this probability, a considerable quantity of stock was sold 
"short." A party headed by John W. Gates, of Chicago, apparently 
gained information as to this intention and proceeded to take all the 
stock that was offered. Amid considerable excitement, the stock 
rose rapidly from a low point of $105 to $146 in the month following- 
Possibly somewhat to their suprise, the Gates party found themselves 
in possession of a majority of the stock. They were simply specu- 
lators, and had no intention of acquiring the road, and finding the 
burden somewhat heavy, the controlling interest was offered to and 
taken by Messrs. J. P. Morgan & Co., but shortly afterwards trans- 
ferred to the Atlantic Coast Line. The latter road paid therefor 
$10,000,000 in cash, $35,000,000 in 4% 50-year collateral trust bonds, 
and $5,000,000 common stock. As, however, the Atlantic Coast Line 
was shortly afterwards selling at $125 per share, the approximate 
purchase price paid for the Louisville & Nashville was $51,625,000, 
which for the $30,600,000 par value shares acquired was an average 
of $169 per share. This was a difference of about $60 per share over 
the average price at which the stock had been selling through the 
preceding year or more, or the equivalent of about $18,000,000, which 
sum apparently was divided between the sellers of the stock, the 
Gates' intermediaries, and the final sellers of the stock. The pur- 



414 LOUISVILLE & NASHVILLE 

chase, however, was highly profitable for the Atlantic Coast Line, for 
the earnings of the road are enormous and more than sufficient to 
justify the price paid. 

A further particular of interest is that the Atlantic Coast Line is 
in turn controlled by a small holding company known as the Atlantic 
Coast Line Company of Connecticut, so that the control of the 
combined Atlantic Coast and Louisville systems, operating and con- 
trolling over 11,000 miles of railway, is vested in an organization 
with a capital of only $10,500,000. (See Atlantic Coast Line). 

The 1906 directorate was made up of Henry Walters, chairman 
of the board, likewise chairman of the board of the Atlantic Coast 
Line, a director of the Colorado & Southern, Northern Central Rail- 
way and other enterprises ; Michael Jenkins, of Baltimore, president 
of the Atlantic Coast Line Company of Connecticut; Alexander 
Hamilton, first vice-president of the Atlantic Coast Line Railroad; 
Warren Delano, Jr., of New York, largely interested in coal enter- 
prises, also a director in the Atlantic Coast ; August Belmont, of the 
banking firm, president of the Interborough-Metropolitan, director 
of the Long Island Railroad, etc. ; Walter G. Oakman, former presi- 
dent of the Guaranty Trust Company of New York, now a director 
in the Interborough, in the Long Island, the Alabama Great South- 
ern, etc. ; John I. Waterbury, president of the Manhattan Trust 
Company of New York, also a director in the International Mer- 
cantile Marine, etc. ; D. P. Kingsley, president of the New York 
Life Company; Edward W. Sheldon, of New York, formerly a di- 
rector and general counsel of the Wisconsin Central ; G. M. Lane, 
Boston; W. G. Raoul, Atlanta; Attilla Cox, Louisville, and Milton 
H. Smith, Louisville, president of the road. 

The affiliations of the Louisville & Nashville are naturally those 
of the Atlantic Coast Line, and through joint ownership of the 
Monon it is also associated with the Southern Railway, its chief 
competitor. 

Management. 

As already noted the chairman of the board, Mr. Walters, is 
also chairman of the Atlantic Coast board. He is the son of William 
T. Walters, who is largely responsible for the upbuilding of the 
Atlantic Coast Line to its present strong financial position. 

Doubtless in consequence of the purchase of the controlling 
interest by the Atlantic Coast, the number of shareholders is small, 
the road reporting only 1,672 in 1904, as against 9,572 for the 
Southern in the same year. 



LOUISVILLE & NASHVILLE 415 

Capitalization. 

Deducting from its funded debt its own bond issues held in its 
treasury, or by trusts, to the par value of $45,639,000, the capital 
account of the road on June 30th, 1906, stood as follows : 

Common stock $ 60,000,000 

Funded debt 129,153,500 

Subsidiary companies (net) 4,938,150 

Total capital $194,091,650 

Securities held 30,160,043 

Approximate net capital $163,931,607 

Approximate net capital, per mile $39,684 

Average miles operated 4,131 

Net earnings on net capitalization 8.9% 

Stock on net capitalization 36% 

Fixed charges on total net income 54% 

Factor of safety (see below) 46% 

In the above estimate of the net capitalization, no consideration 
has been taken of rentals paid or received. The amounts received 
were greater than the amounts paid, and this item would therefore 
tend slightly to reduce rather than augment the net capitalization 
of the road. 

It will be seen that with gross earnings of $10,400 per mile, the 
average capitalization of the road is low ; its figure of $39,684 com- 
paring with $49,223 per mile for the Southern Railway, with gross 
earnings of $7,200 per mile, and $47,453 for the Seaboard, with gross 
earnings of $5,790 per mile. 

In 1894 Louisville & Nashville closed its construction account, 
and since that time has charged large sums annually for improve- 
ments to its operating expenses. The amounts so charged are 
itemized in the reports, and if the $2,586,000 so devoted in 1906 be 
added to the net earnings of that year, as is the general custom with 
other roads, the net earnings show 8.9% on the net capitalization. 
This figure compares with similar estimates of 4.2% for the Southern 
Railway, 3.7% for the Seaboard and 7.9% for the Illinois Central. 

As to the style of capitalization, it will be seen that the larger 
part is represented by the funded debt, the stock amounting to only 
36% of the net capitalization. 



416 LOUISVILLE & NASHVILLE 

In keeping with the high earnings of the road, fixed charges 
consumed in 1906 only 54% of the total net income shown in the 
report. This is on the nominal net income, but if as is customary 
on other roads, the sums devoted from earnings to improvements 
were included in the income, fixed charges for 1906 represented only 
45% of this sum, leaving a Factor of Safety on the underlying 
securities of a full 55%. 

Were the considerable equities accruing to the Louisville & 
Nashville from its stock ownership of other roads considered, in 
the estimate of total net income, this factor of safety would rise 
to a still higher figure. 

Equities Owned. 

The largest single interest which the Louisville & Nashville 
has in outside companies is its ownership of $7,176,600 par value 
of the $10,000,000 of stock of the Nashville, Chattanooga & St. 
Louis. This road is operated separately, but under practically the 
same management, and is to all intents a part of the system. It 
paid in 1905, 5%, but after heavy improvement charges showed a 
surplus of approximately 9^% on its capital stock. Additions to 
property and equipment from earnings amounted to $1,289,421, 
and this was after probably excessive maintenance charges, so that 
the surplus earned by the road for the year was not less than 
$2,200,000, and actually considerably in excess of this. The Louis- 
ville & Nashville's interest in the undivided surplus in this company 
for the year was not less than $1,200,000. 

As its one-half interest in the Monon, the Louisville & Nash- 
ville owns $4,893,450 par value out of a total of $10,500,000 of the 
common stock, and $1,936,700 par value of the preferred, or a total 
of $6,830,600. Jointly the two roads own 92^% of the common 
and 77% of the preferred, paying for the same a total of $11,827,000. 
On its half of this interest, the Louisville & Nashville received in 
1906, $224,571, or just about sufficient to pay the 4% interest on the 
purchase bonds. On the common stock in 1906, the Monon earned 
above 9%, which left an equity amounting to about 6%, or in the 
neighborhood of $300,000. 

The Louisville & Nashville likewise has a half interest in the 
profits of the Georgia Railroad and dependencies, leased jointly with 
the Atlantic Coast Line, but the amount earned was not considerable. 

All told the company received in 1906 from its investments, 
$814,318, which was equivalent to 2.7% on the book valuation of the 
securities it owns. The equities in the undistributed surplus of these 



LOUISVILLE & NASHVILLE 



417 



outside companies would have been much more than this amount, 
so that the book valuation is probably under rather than over their 
actual worth. 

Increase of Capitalization. 

The increase of capitalization as compared with the gross earn- 
ings for a period of six years has been as follows : 



Year 


Capital Stock 


Funded Debt 


Total 


Gross Earnings 


1900. . , . 
1906 


$55,000,000 
60,000,000 


$90,026,660 
129,153,500 


$145,021,160 
189,153,500 


$27,742,379 
43,008,996 



Net income over six years : Nominal capital, 30% ; gross earn- 
ings, 55%. 

Of the $45,000,000 of new capital added in the six years, about 
twenty million dollars has gone into the purchase of securities in 
outside companies, so that the actual increase of the road has been 
only a little over 15%. Again in 1900, the company included in its 
gross earnings its own company freight, which was not done in the 
following years, so that the actual increase in gross earnings was 
slightly larger than that shows, or around 60%. This heavy 
increase in earnings on a comparatively slight capital increase is 
due to the policy of the road in turning back a large proportion of its 
surplus earnings into improvements. 

Character of Traffic. 

The Louisville & Nashville is one of the roads which do not 
itemize their traffic tonnage. Passenger traffic contributed less than 
20% of the gross earnings of the road. Cotton is obviously a large 
factor, and another is the mineral industries of Northern Alabama. 
Taken as a whole the company's business is widely distributed, and 
its earnings are not dependent upon any particular product. 

Stability of Earnings. 



Since 1896, the gross and mileage earnings have shown as 
follows : 



27 



418 



LOUISVILLE & NASHVILLE 



Year 


Miles Operated 


Gross Earnings 


Earnings 
Per Mile 


1895-6 

1896-7 

1897-8 

1898-9 

1899-0 

1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


2,965 
2,981 
2,988 
2,988 
3,007 
3,169 
3,327 
3,439 
3,618 
3,826 
4,131 


$20 ,390 ,711 
20 ,372 ,308 
21 ,996 ,653 
23 ,759 ,485 

27 ,742 ,379 

28 ,022 ,206 
30 ,712 ,257 

35 ,449 ,378 

36 ,943 ,793 
38,517,071 
43 ,008,996 


$6 ,877 

6,834 

7,361 

7,951 

9,224 

8,841 

9,232 

10 ,308 

10,211 

10,066 

10,411 



In the years against which an asterisk stands, the company 
included its company freight in the total of gross, these amounting 
in 1901, for example, to about $1,200,000. The actual increase for 
the eleven years shown was somewhat greater than the table repre- 
sents. Even as it was, it will be seen that the gross earnings more 
than doubled, and the mileage earnings actually increased more 
than 50%. 

It will be seen that with the exception of the two years from 
1900 to 1901, the increase in the mileage earnings has been steady, 
and without interruption, though these earnings were practically 
stationary for the four latter years. 

Maintenance. 

It has already been noted that large sums have been annually 
charged to operating expenses for improvements, the amount in 
1906 being $2,586,000. It follows naturally from this that the main- 
tenance charges have been heavy. For six years they compare as 
follows : 



Year 


Traffic Density 


Maintenance per Mile j 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


838,114 
923,505 
992,853 
956,427 
916,362 
950,304 


$1,374 
1,363 
1,554 
1,576 
1,490 
1,582 


$1,260 
1,324 
1,547 
1,548 
1,659 
1,886 


$2,634 
2,687 
3,101 
3,124 
3,149 
3,468 


Average. . . . 


929,594 


$1,490 


$1,537 


$3,027 


111. Cent 

Seaboard 

Atl. Coast .... 


1,180,351 
435,987 
311,366 
257,769 


1,386 
860 
620 
709 


1,486 
964 
611 
556 


2,872 
1,824 
1,231 
1,265 



The total maintenance in 1906 amounted to $14,328,000. The 
$2,586,000 charged to expenses for improvements amounted to 18% 



LOUISVILLE & NASHVILLE 419 

of the total. There were very nearly corresponding amounts in the 
previous years, so that for the purpose of a comparison with other 
roads, the Louisville & Nashville might be legitimately scaled by 
one-sixth. This would have reduced the average total maintenance 
for the six years to about $2,500 per mile. 

On this basis it will be seen that the Louisville & Nashville 
standard of charges was rather below the Illinois Central, traffic 
density compared. The traffic density of the Southern was less than 
one-half, and its maintenance charges only about one-third less. The 
traffic density of the Seaboard was only one-third and its mainten- 
ance about half. While therefore the Louisville & Nashville's main- 
tenance charges have been very liberal, the amounts buried in main- 
tenance have hardly been so great as some extravagant estimates 
have represented. For the purpose of getting at the actual surplus 
earnings of the road it would probably be safe to do what has been 
done here, that is, simply to take the amounts charged to 
improvements annually as shown in the company's reports, and add 
these to the nominal surplus shown. 

These amounts since the closure of the construction account in 
1894 compare as follows: 

1894-5 $ 279,584 

1895-6 617,342 

1896-7 546,571 

1897-8 659,950 

1898-9 517,785 

1899-0 1,021,843 

1900-1 1,474,503 

1901-2 1,487,277 

1902-3 2,000,204 

1903-4 1,746,184 

1904-5 2,562,314 

1905-6 2,586,630 

Total — $15,500,187 

These amounts may be used for the purpose of comparison with 
similar charges on other roads usually deducted from the nominal 
surplus earnings. For example, since 1900 the amount so set aside 
from earnings on the Southern Railway was $2,830,182. 



420 



LOUISVILLE & NASHVILLE 
Surplus Earnings. 



The amounts shown in the table below are the nominal surplus 
earnings shown in the reports of the company, plus the amounts 
charged to operating expenses annually for improvements as shown 
in the table above. 



Year 


Surplus 


Per cent. 
Earned on 
Common 


Dividends 
Paid on 
Common 


Average 
Price 


1900-1 


$5,755,615 
6,212,585 
8,211,252 
8,434,355 
9,389,354 
8,935,004 


10.4 
10.3 
13.6 
14.0 
15.6 
14.9 


5 
5 
5 
5 
5 
6 


87 


1901-2 


111 


1902-3 


109 


1903-4 


117 


1904-5 


146 


1905-6 


147 







Dividend Record. 

The complete dividend record for 36 years stands as follows 
Year. Cash % Stock. 

1871-3 7 

1874-6 — 

1877 \y 2 

1878 3 

1879 4 

1880 8 100 

1881 6 

1882 . . 3 

1888-9 — 5 

1890 1.1 4.9 

1891 5 

1892-3 4 

1894-8 — 

1899 3^ 

1900 4 

1901-4 5 

1905-6 6 

The Balance Sheet. 

At the close of the fiscal year of 1906 the company showed : 

Current assets $12,712,706 

Current liabilities 9,546,430 

Leaving a working balance of $ 3,166,276 



LOUISVILLE & NASHVILLE 421 

This was a very great improvement for the company's working 
capital over the previous year, when, on account of various ex- 
penditures, the current liabilities were nearly $5,000,000 in excess 
of the current assets. 

The items of cash amounted to $8,245,502, and the balance to 
the credit of profit and loss was $18,130,045. 

Investment Value. 

A road which in six years has been able to add 50% to it? 
gross earnings on an actual increase of railway capital proper of 
not more than 15%, has obviously kept its property in the pink of 
condition. After charging its earnings heavily for improvements, 
it is probable that the actual earnings which have gone back into 
the road have very considerably exceeded the amounts shown in the 
reports, and given in the tables above, but this has been the policy 
of all the prosperous roads of the United States, and what one road 
does another more or less must do. For this reason it would prob- 
ably be safe, as already noted, to consider the actual earnings of the 
Louisville & Nashville on its stock, exclusive of equities, at about 
the percentage shown in the table of surplus above. 

On the other hand, the road might at a pinch of necessity have 
added at least one million dollars to its other income, by increasing 
the dividends of the controlled roads, and were the surplus of the 
roads in which it has a joint interest with the Atlantic Coast Line 
and Southern Railway likewise to be divided, this might add from 
$400,000 to $500,000 more. Excluding this latter consideration, it 
is safe to say that the actual earnings of the Louisville & Nashville 
in 1906 available for dividends on its stock was not less than $10,- 
000,000, or equivalent to 16.2% on the stock outstanding. Even on 
a scale of a dollar for dividends, and a dollar for improvements 
(which few roads, the Pennsylvania least of all, adhere to), the 
Louisville & Nashville in 1906 could have comfortably paid 8% 
dividends and turned back an equal amount ; that is to say, nearly 
$5,000,000 into the betterment of the road. 

If, therefore, the road were to be taken over under lease by 
the controlling Atlantic Coast Line, it is safe to say that the minority 
of the stockholders, who apparently hold about 49% of the stock, 
would probably not be willing to accept an offer of less than an 8% 
guarantee. The road is at present paying 6% dividends, and on this 
basis the stock would readily be entitled to sell around $150 per 
share, with money ruling at 4%. If no more than 1% were added 
to the dividend, this would readily carry the stock to from $165 to 



422 LOUISVILLE & NASHVILLE 

$175 per share on earnings as solid and management as conservative 
as that of this company. If the south should experience no serious 
setback, and the traffic of the road no more than hold its own, it is 
not improbable that a 7% dividend would be paid, and eventually an 
8% dividend. 

On a 5% basis, Louisville & Nashville sold up to a high point of 
$159 per share in 1902, a figure reached largely through the re- 
markable occurrence of that year already detailed ; it sold off to $95 
in the year following. On a 6% basis it touched $157 in 1905, and 
about the same figure n January of 1906. In the very heavy de- 
cline in the spring of 1907 it sold off to $108 per share. This is 
probably a bed rock figure. It is probable that purchased at any- 
thing like $125 per share or better, its general tendency would be 
considerably above this figure, and it is obvious that if the road 
were taken over by the Atlantic Coast Line, at a guarantee of 7% 
or 8%, it would, with the strong backing of this company, tend to 
sell on a 4% basis; that is to say, at from $175 to $200 per share. 



MAINE CENTRAL RAILROAD. 

The Maine Central is a subsidiary company of the Boston & 
Maine, the latter owning the majority of its capital stock. It is 
operated in close connection with the Boston & Maine, and has the 
same president as the latter. 

The road represents the consolidation of Maine railroads in 
1862, and the larger part of its mileage lies within that state. 

The main line of the road extends from Portland, through 
Bangor to Vanceboro, on the Canadian border, and again to Calais 
and Eastport, at the extreme easterly sea line of the state. Another 
important branch extends from Portland northwesterly through the 
White Mountains to Lime Ridge in Canada, connecting with the 
Canadian Pacific and the Quebec Central. It operates a total of 816 
miles, and this mileage has not changed materially in recent years. 

! ! ■ : 

Ownership. 

The directorate of 1906 included five directors of the Boston & 
Maine — Lucius Tuttle, president; Samuel C. Lawrence, Medford, 
Mass. ; Lewis Cass Ledyard, New York; Henry M. Whitney, an im- 
portant figure in New England financial affairs, Brookline, Mass., 
and Alvah W. Sulloway, Franklin, N. H. The other directors were 
George F. Evans, vice-president and general manager, Portland, 
Me. ; Franklin A. Wilson, Bangor ; John Ware, Waterville, Me. ; 
United States Senator William P. Frye, Lewiston, Me. ; Joseph W. 
Symonds, Edward P. Ricker, South Poland, Me., and George 
Varney, Bangor. The road reported in 1905, 779 stockholders. 

The affiliations of the road are naturally those of the Boston 

& Maine. 

i 
Capitalization. 

i 
On June 30th, 1906, the capital account of the road stood as 
follows : 

(423) 



424 MAINE CENTRAL 

Common stock $ 4,976,100 

Other stock 11,900 

Total $ 4,988,000 

Funded debt 11,892,192 

Nominal capital $16,880,192 

Rentals, capitalized at 4% 13,779,000 

Approximate gross capital $30,659,192 

Securities held 1,107,624 

Approximate net capitalization $29,542,468 

Average net capitalization per mile $36,204 

Miles operated 816 

Net earnings on net capital 5.9% 

Stock on net capital 17% 

Fixed, charges on total net income 46% 

Factor of safety (See text.) 

The reports of the road show the capitalization of the leased 
lines, the stocks and bonds of the latter amounting to $14,500,000. 
This, it will be seen, is very near to the figure obtained by capital- 
izing at 4% the rentals paid by the Maine Central. 

The estimated net capitalization here shown is rather low 
for an eastern road, its $36,204 per mile standing against $77,660 per 
mile for the Boston & Maine, and $103,741 per mile for the New 
Haven. 

From the gross earnings there is to be deducted $139,000 net 
earnings from water lines, which are included, however, in the total 
net income. On this basis the net earnings show 5.9% on the 
estimated net capital. Operating expenses were, however, very 
heavily charged, and include items of $828,027 expended for new 
equipment and $434,553 appropriated for second track, shops and 
terminals. Were these two items added to the net earnings, the 
percentage shown would naturally have been much higher — about 
10%. As it is, the 5.9%j for the Maine Central stands against 
5.6% for the Boston & Maine and 8.2% for the New Haven. 

The capital stock represented only 17% of the estimated net 
capitalization, and, nominally, fixed charges for 1906 consumed 77% 
of the total net income. If, however, the $1,262,580 expended for 
improvements noted above had been included in the total net income, 



MAINE CENTRAL 



425 



the fixed charges would consume only about 46% of the whole. 
As these appropriations were purely arbitrary, it follows that the 
margin of safety for the underlying securities is large, and as the 
earnings of the road are comparatively even, the bonds of the road 
are a gilt edge class of security. 

The company's holdings of stocks and bonds are small. The 
especial items are 5,934 shares of the Portland & Ogdensburg 
Railroad and 5,451 of the Boston & Canada Railway, these and other 
items being carried on the books at a total valuation of $1,107,624. 

In the five years from 1901 the nominal capitalization of the 
road has slightly decreased through the discharge of bonds, while 
the gross earnings have increased 23%. This is an excellent 
showing. 

Character and Stability of Traffic. 

The Maine Central does a very general transportation business ; 
its passenger earnings represent nearly 40% of the gross earnings ; 
and its freight tonnage is widely distributed, there being no single 
item of any importance. While the mileage operated has not in- 
creased within the last ten years, the gross earnings per mile have 
risen from $7,191 to $9,381. This increase has been very even, as 
the following table will show : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1900-1 


816 
816 
816 
816 
816 
816 


$5,868,547 
6,194,304 
6,541,160 
6,773,560 
7,099,219 
7,655,655 


$7,191 


1901-2 


7,591 


1902-3 


8,016 


1903-4 


8,301 


1904-5 

1905-6 


8,700 
9,381 







The charges have been as follows: 



Year 


Traffic Density 


Maintenance per Mile 


Total* 


Way 


Equipment* 


1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


404,975 
417,999 
451,458 
486,194 
544,209 


$1,325 
1,413 
1,338 
1,509 
1,813 


$1,316 
1,339 
1,534 
1,003 
1,790 


$2,641 
2,752 
2,872 
2,512 
3,603 


Average. . . . 


460,967 


$1,479 


$1,396 


$2,875 



* Estimated. 



426 



MAINE CENTRAL 
Maintenance. 



The reports of the Maine Central are not made up in the ordi- 
nary form, and included in the maintenance charges for 1906 is 
$828,000 paid for new equipment, which brings up the estimated 
maintenance of equipment to a very high figure per mile, as com- 
pared with previous years. 

Maintenance of way was likewise charged on a much higher 
basis than in former years, the total maintenance amounting to 
$3,600 per mile as here estimated. This surcharge of maintenance 
is shown in the increased percentage of operating expenses, and it 
is safe to say that on the traffic density of the Maine Central, the 
maintenance in former years has been adequate, so that the extra 
thousand dollars per mile apparently appropriated for 1906 repre- 
sents a considerable surcharge. This is almost exactly the amount 
paid for the new equipment. 

It has, however, been the policy of the road for a series of years 
to make such appropriations from its earnings, the amount in detail 
for five years being as follows : 

1901-2 $637,796 

1902-3 641,920 

1903-4 740,237 

1904-5 191,764 

1905-6 828,027 

From the surplus of 1904-5, $300,000 was also set aside for new 
terminals at Bangor, and an additional $100,000 in 1906. 

Surplus Earnings. 

While the gross earnings rose 25% in five years, the sur- 
plus shown has hardly made a corresponding increase. It is evident, 
therefore, that the surplus has been adjusted to income. On this 
account the percentage shown as earned upon the common stock 
is merely a nominal figure. 

The items have been as follows : 



Year 


Surplus 


Dividends 

Earned on 

Common 


Per cent. 
Paid on 
Common 


Average 
Price 


1901-2 


$360,597 
407,201 
431,653 
577,263 
418,027 


7.2 
8.1 
8.6 
11.5 
8.9 


6 
6 

7 
7 

7 


163 


1902-3 


169 


1903-4 


176 


1904-5 


185 


1905-6 


198 







MAINE CENTRAL 427 

The Maine Central paid 6% through twenty consecutive years ; 
that is to say, from 1884 to 1903 inclusive. Beginning with 1904, it 
has paid dividends at the rate of 7%. 

The Balance Sheet. 

The general balance sheet for June 30th, 1906, showed : 

Current assets $1,956,249 

Sundry assets 1,441,234 

Total $3,397,483 

and current liabilities $ 887,717 

Sundry items 2,351,636 

Total $3,239,353 

Leaving a balance of $ 158,130 

The amount to the credit of profit and loss was $1,176,992. 

Investment Value. 

The stock of the Maine Central is held chiefly in New England, 
where it is highly regarded by reason of its conservative manage- 
ment and the uninterrupted payment of dividends through good 
years and bad. In 1903, in anticipation of the increase of the divi- 
dends, the stock touched $195 per share; it subsequently sold off 
in 1904 to $158, rising again to $198 in 1906, and declining but little 
in the general slump of 1907. 

It is obvious that this could be due only to the fact that the road 
is actually earning much beyond its dividend, and that there is little 
of the stock for sale. In 1905, the actual surplus earned was above 
$1,000,000, and in 1906 the amount, including $1,262,000 new equip- 
ment, second track construction, etc., charged to operating ex- 
penses, was $1,666,000. If the average of these two years had been 
evenly divided between dividends and improvements, this would still 
have justified 12% or even 15% dividends, or twice the amount 
paid. It matters little to the stockholders whether earnings be paid 
in divdends or spent in betterments, providing always that the 
money is well spent. Should the favorable showing which the road 
has made be continued, the stock would eventually sell at much 
higher figures than any it has yet reached. 

This possibility became accentuated by the virtual merger of 
the Boston & Maine system with the New Haven in 1907. 



MICHIGAN CENTRAL RAILROAD. 

The Michigan Central is little more than one of the larger 
divisions of the New York Central. Nominally it is operated sep- 
arately, owned separately, but it has much the same set of directors 
and officers, and the New York Central owns 90% of its stock. 
It is therefore of interest only for the equities which the New York 
Central may have in its earnings. 

In 1898, for $16,814,000 par value of stock, the New York 
Central exchanged $19,336,000 3^% collateral gold bonds; i. e., at 
$115 per share. A dividend of 4% on the stock just about equals the 
interest on the bonds, so that all earned over 4% is clear gain to the 
New York Central. 

Under the Michigan Central is now included also the Canadian 
Southern, leased to the Michigan Central for 999 years, the latter 
guaranteeing the interest on its bonds and a 2^2% dividend on the 
$15,000,000 of the stock until 1910, and thereafter at 3%. 

At the close of 1906 the company acquired a majority of the 
capital stock of the Chicago, Kalamazoo & Saginaw Railway — 
55 miles — and during the year it also acquired $3,000,000 par value 
of the common stock and $3,000,000 of 4% bonds of the Chicago, 
Indiana & Southern, the balance of the stock and the larger part 
of the bonds of that road being owned by the Lake Shore. 

In 1905 the road reported only 508 shareholders. 

Capitalization. 

As of January 1st, 1907, the capital account stood as follows: 

Stock $18,738,000 

Funded debt 25,265,000 

Canada Southern bonds 20,000,000 

Canada Southern stock 15,000,000 

Other leased line bonds 1,778,100 

Total capital $80,781,100 

Rentals capitalized at 4% 4,732,755 

(428) 



MICHIGAN CENTRAL 429 

Approximate gross capitalization. .. .$85,513,855 
Securities held 10,833,338 

Approximate net capitalization $74,680,517 

Approximate! net capitalization per mile.. $42,796 

Average miles operated 1,745 

Net earnings on net capital 6.1% 

Stock on net capitalization 25% 

Fixed charges on total net income (est.) . . 57% 

Factor of safety (est.) 43% 

It will seen that the net capitalization for a road earning 
$15,000 per mile is fairly low. - Yet, on the estimated net capital 
the net earnings as shown in the company's reports for 1906 
amounted to only 6.1%. This figure is, however, misleading. 
Further reference to the report will show that the operating ratio 
for 1906 was 82.7%. It has been around this figure for a number 
of years, and this is due to heavy sums for improvements charged 
directly to operating expenses. The operating ratio of the New 
York Central is about 70%, the Lake Shore 62%, the Nickel Plate 
70% ; and it is easy to see that the normal operating ratio of a road 
of the Michigan Central's high standard would not exceed 70% at 
the outside. Net earnings concealed in the maintenance accounts 
have therefore been estimated for 1906 at 12%. If this amount 
be added to the net earnings shown, the percentage of ret earnings 
on net capital would be equivalent to about 8.8%, and fixed charges, 
which nominally consumed 80%, do not, in reality, consume above 
57% of the actual total net income. 

The proportion of stock to the total net capital is small, 33%, 
but the earnings of the road are very stable. For a series of years 
they have shown as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896 


1,642 
1,658 
1,658 
1,658 
1,635 
1,658 
1,653 
1,653 
1,653 
1,745 
1,745 


$13,821,614 
13,697,239 
14,046,149 
15,504,062 
16,730,131 
18,490,274 
19,045,083 
22,552,201 
21,492,944 
23,283,868 
26,275,588 


$8,416 


1897 


8,261 


1898 


8,471 


1899 


9,351 


1900 


10,232 


1901 


11,152 


1902 


11,527 


1903 


13,643 


1904 

1905 


13,002 
13,343 


1906 


15,057 







Miles of second track, 220. 



430 



MICHIGAN CENTRAL 



It will be seen that in ten years the earnings have very nearly 
doubled, and this has been accomplished with a very small increase 
in capitalization. 

Maintenance. 

For a series of years the traffic density and maintenance have 
shown as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900 


1,226,914 
1,254,314 
1,188,813 
1,486,839 
1,413,724 
1,574,483 
1,744,591 


$1,616 
2,076 
2,279 
2,098 
1,896 
1,959 
2,000 


$1,472 
1,667 
1,440 
2,090 
1,972 
2,514 
3,176 


$3,088 


1901 


3,743 


1902 


3,719 


1903 


4,188 


1904 


3,868 


1905 


4,473 


1906 


5,176 






Average. . . . 


1,426,077 


$1,989 


$2,047 


$4,036 



The increase of maintenance charges for 1906 over 1905, with 
the same mileage operated, amounted to $1,225,000, and the charges 
for 1905 were undoubtedly high. They have been high for years, 
and represent a steady policy of improvements from earnings. It is 
safe to say that the surcharge in maintenance in 1906 was not 
less than $1,200 per mile, and this amount on the 1,745 miles 
operated would reduce the operating expenses to a 70% basis. 

Surplus Earnings. 

It may be assumed, therefore, that the actual surplus for 1906 
was about $2,000,000 greater than that shown in the report. With 
an increase of 50% in gross earnings, the nominal surplus from 1900 
has shown as follows : 



Year 



1900 
1901 
1902 
1903 
1904 
1905 
1906 



Surplus 



5 840,666 
983,297 
1,110,646 
1,244,773 
872,775 
973,453 
987,827 



Per cent. 

Earned on 

Common 



4.5 

5.2 

5.7 

6. 

4.1 

5.2 

5.2 



Dividends 
Paid on j 
Common 



In 1906 the stock was put on a 6% basis, so that, nominally, the 
road did not earn its dividend for that year. The actual surplus 



MICHIGAN CENTRAL 431 

earnings were at least equal to, if they did not exceed, $3,000,000, or 
equivalent to about 16% on the capital stock. If this sum were 
evenly divided between dividends and improvements — and the most 
conservative policy could scarcely ask more — the road might readily 
have paid 8%. On the most conservative basis, therefore, the New 
York Central's equity in the earnings was at least 2% on the capital 
stock owned, or about $330,000 for 1906, above the regular 6% 
dividend. 

The Michigan Central paid a 4% dividend from 1895 up to 
1906. 

The Balance Sheet. 

The balance sheet for the end of 1906 indicated clearly enough 
that the company w r as in need of working capital. It showed : 

Current assets $ 5,108,037 

Current liabilities 12,622,228 

Leaving a debit balance of $ 7,514,191 

In addition to the above there were 

Items of liabilities in suspension of $ 1,906,640 



Making a total adverse balance of . . . .$ 9,420,831 

There were loans and bills payable of $6,250,000 and sundry 
accounts payable exceeded accounts collectable by over $2,500,000. 

The credit of the company is high, and the sale of $10,000,000 
3-year 5% notes in January of 1907 provided the company with 
ample funds with which to carry on its improvement work. 

Investment Value. 

In 1906 the Michigan Central was building the third rail 
electric tunnel road under the Detroit River from Windsor, Ontario, 
to Detroit, Michigan. It will be two and one-half miles long, and is 
estimated to cost between eight and ten million dollars. The bonds 
of the Detroit River Tunnel (authorized issue $15,000,000) will be 
guaranteed by the Michigan Central. This tunnel will add in the 
neighborhood of $400,000 to the fixed charges of the road, but, with 
traffic merely at the present level, the officials of the road estimate 
that the tunnel will easily effect a saving in the cost of operation over 
the present car ferry system ample to provide for this increase. On 
the other hand, the construction of this tunnel will very considerably 
transform the character of the Michigan Central and its completion 
should add very materially to the gross earnings of the road. 



432 MICHIGAN CENTRAL 

The double tracking of the road from Chicago to Niagara was 
not complete in 1906, and this expenditure will call for still further 
loans or expenditures from earnings. 

The equipment of the road is obviously inadequate from the 
fact that it paid in 1906 a balance of car mileage of $973,663, a con- 
siderable increase over the $770,595 paid in 1905. Considerable ad- 
ditions to the rolling stock will therefore be required to keep pace 
with the growing traffic of the road. 

In view, therefore, of the highly conservative dividend policy 
of the Vanderbilt roads, it is not improbable that the increase of 
the dividend from 4% to 6% in 1906 will fix the dividend rate for 
some years to come. 

On a 6% basis the stock would not be especially cheap, there- 
fore, at above $150 per share. It sold as high as $200 per share in 
1906. There is very little of the stock to be had, and while it is as 
solid as any stock upon the list, there are others with an equal degree 
of security on which the return would be higher. 



MINNEAPOLIS AND ST. LOUIS RAILROAD. 

The Minneapolis & St. Louis is one of the smaller railroads of 
the Mississippi Valley which have not yet been absorbed by any of 
the larger systems. It belongs in the Hawley group, which also owns 
the Iowa Central, and the two roads have the same operating offi- 
cers, though they report separately. The "Clover Leaf" (Toledo, 
St. Louis & Western), is controlled by much the same set of in- 
terests. • 

Formerly distinctly a north and south line, the company has 
now a line reaching from Minneapolis to Watertown in South 
Dakota, and this line is being extended westerly to the Missouri 
River. It has also a branch extending southward from Winthrop to 
Storm Lake in Iowa, where it joins the Illinois Central. 

History. 

The original Minneapolis & St. Louis was a short line which 
gave the Burlington, Cedar Rapids & Northern, and through that 
line the Rock Island, a route from Chicago to St. Paul. The road 
was sold under foreclosure in 1894, and the present company is a 
reorganization of that year. In 1899 the company purchased from 
the Wisconsin, Minnesota & Pacific a line into South Dakota. In 
1900 the new interests in the road obtained control of the Iowa 
Central, since which time the two roads have been operated together. 

The extension to Storm Lake, Iowa, was completed the same 
year, and in 1904 the Minneapolis & St. Louis acquired by purchase 
a controlling interest in the Des Moines & Fort Dodge, operating 
157 miles. Stock of a par value of $2,530,000 out of a total of 
$4,283,000, was obtained at a cost of $641,678. 

At the close of the fiscal year of 1906 the road was operating a 
total of 799 miles. It runs mainly through farming country, but 
the Iowa Central reaches a number of coal mines, which contribute 
to the traffic of the two roads. 



28 



(433) 



434 MINNEAPOLIS & ST. LOUIS 

Ownership. 

The directorate of 1906 included Edwin Hawley, president, also 
president of the Iowa Central and head of the Hawley group of 
roads ; H. E. Huntington, of Los Angeles, at the head of a very 
extensive system of suburban railways in Southern California; 
James N. Wallace, president of the Central Trust Company 
of New York; also a director in the National Railway of 
Mexico ; John E. Searles, president of the Tennessee Northern ; Levi 
C. Weir, president of the Adams Express Company, also a director 
in the Norfolk & Western ; George Crocker and F. E. Palmer, New 
York; L. F. Day, vice-president, and F. H. Davis, treasurer of the 
road. 

The directorate of the Iowa Central includes much the same 
group, with the addition of Theodore P. Shonts, president of the 
Clover Leaf, and Paul Morton, president of the Equitable Life As- 
surance Society. 

Capitalization. 

For the purpose of extending its line westward from Water- 
town, South Dakota, the road issued $5,000,000 of notes in 1905. 
The notes are secured by the entire issue of capital stock and the 
first mortgage bonds of the construction company, and at the close 
of the fiscal year of 1906 the road had on deposit with the Central 
Trust Company of New York securities valued at $4,767,997. 

The road also guarantees, both as to principal and interest, the 
first mortgage bonds of the Des Moines & Fort Dodge. Including 
all these items, its capital account on June 30th, 1906, stood as 
follows : 

Common stock $ 6,000,000 

Preferred stock 4,000,000 

Total stock $10,000,000 

Funded debt (net) 19,070,000 

Des Moines & Fort Dodge guaranteed bonds 3,072,000 
Five year notes 5,000,000 

Total capital $37,142,000 

Securities held 5,996,997 

Approximate net capital $31,145,003 



MINNEAPOLIS & ST. LOUIS 435 

Approximate net capital, per mile $38,978 

Average miles operated 799 

Net earnings on net capital 5.0% 

Stock on net capitalization 31% 

Fixed charges on total net income 77% 

Factor of safety 23% 

The rentals received about balance the rentals paid, so that 
this was a negligible item. 

The capitalization per mile compared with other lines in the 
same territory is undoubtedly high, the average of $38,978 per mile 
comparing with $33,900 for the St. Paul, $32,057 for the North 
Western, and $29,128 for the Burlington. And where all three of 
these roads earned in the neighborhood of $8,000 per mile, the 
Minneapolis & St. Louis in 1906 earned only $4,664. 

This fact of over-capitalization is further attested by the fact 
that the net earnings for the flush year of 1906 represented only 5% 
on the estimated net capitalization. This for a western road was 
very low. The same figure on the St. Paul was 9.8%, on the 
North Western 10.5%, and for the Burlington 8.7%. 

Nor is this over-capitalization largely represented by harmless 
stock on which no dividends are being paid. Of the estimated net 
capitalization the stock represents only 31%. The combined result 
of these factors is that in 1906, even after extremely modest main- 
tenance charges, the fixed charges consumed 77% of the Total Net 
Income. 

This left a Factor of Safety for the relatively large amount of 
funded debt of only 23%, and it is to be remembered that these rep- 
resent the proportions in a year of almost unparalleled prosperity 
for the territory through which it runs. 

The securities owned by the company are principally the stocks 
or bonds of subsidiary organizations, in none of which does there 
lie equities of any importance. 

Increase of Capitalization. 

Dating from 1898, the mileage taken over by the reorganized 
company has been rather more than doubled. Comparing the capi- 
talization at the beginning and end of this period, we find that in 
1898 the company had outstanding stocks and bonds to the amount 
of $22,500,000, and in 1906, excluding the borrowings for new con- 
struction, $32,142,000. This was an increase of about 46%. In the 
meanwhile gross earnings increased 67%. It will be seen therefore, 



436 



MINNEAPOLIS & ST. LOUIS 



that the over-capitalization dates from the reorganization of the 
road, and that the company is now earning considerably more on 
its invested capital. 

Stability of Earnings. 

Of the company's revenue freight, nearly one-half is farm 
products, the balance being distributed over coal, lumber and general 
merchandise. Passenger earnings are relatively high, contributing 
nearly 30% of the gross earnings in 1906. 

Comparing the earnings of the road, it will be seen that the 
extensions of the road since the reorganization have considerably 
reduced its average earnings per mile, the items for a series of years 
comparing as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896 


370 

366 

436 

514 

633 

633 

642 

642 

730* 

799* 


$2,006,505 
2,246,584 
2,500,004 
2,863,308 
3,275,504 
3,540,840 
3,265,472 
2,850,565 
3,076,756 
3,726,665 


$5,424 


1897 


6,141 


1898-9 


6,001 


1899-0 


5,568 


1900-1 


5,174 


1901-2 


5,593 


1902-3 


5,086 


1903-4 


4,440 


1904-5 


4,212 


1905-6 


4,664 







* Includes Des Moines & Fort Dodge Ry. 

This reduction in the average earnings per mile is in the 
contrary direction to most western roads, and indicates the inherent 
weakness of the line. Its tracks run through a relatively well-set- 
tled farming country, and a large part of the traffic is local busi- 
ness. The line does not connect any important terminals, and for 
this reason it is almost entirely dependent upon the very gradual 
growth of its territory. 

Maintenance. 



It will be seen from the following table that the traffic density 
of the line is very low, and that instead of increasing, as has been 
true generally of western roads in a very notable degree, this traffic 
density has declined with the doubling of the mileage of the road. 
The items compare as follows : 



MINNEAPOLIS & ST. LOUIS 



437 



Vpar 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


370,728 
345,809 
279,832 
240,426 
255,612 
276,813 


$ 939 
1,036 
732 
483 
463 
556 


$485 
440 
474 
473 
450 


$1,424 

1,476 

1,206 

956 

913 

1,071 


Average. . . . 


294,870 


$701 


$473 


$515 


Wis. Central.. 
C. &N. W.... 
St. Paul 


715,270 
640,983 
601,003 


$793 
991 1 
929 


$700 

858 
632 


$1,493 
1,849 
1,561 



Corresponding with this decline in the average traffic density 
has been a corresponding decline in the appropriations for main- 
tenance from nearly $1,500 per mile in 1900-1 to a little over a 
thousand dollars per mile in 1906, but this reduction has been rather 
heavier than the reduction in average traffic, so that the road could 
hardly have been as well maintained in 1906, as, for example, in the 
two years noted. 

Comparison is introduced with three roads which lie in more or 
less the same territory. It will be seen that, traffic densities com- 
pared, the average maintenance for six years for the Minneapolis & 
St. Louis seems favorable, but it is quite impossible to maintain 
one road of half of the traffic density of another for half the average 
expenditure per mile. And on none of the three roads put in com- 
parison has maintenance been very liberal. In the case of the St. 
Paul it has been notably low. It seems fairly certain, therefore, that 
this is about bedrock maintenance for the Minneapolis & St. Louis, 
and that no surplus earnings are concealed in this item. 

Furthermore, where the North Western and the St. Paul, for 
example, set aside large sum for earnings from improvements, no 
specific appropriations of this sort have been made by this com- 
pany, and the amount carried to credit of profit and loss is not 
large. 

Surplus Earnings. 

The nominal surplus shown before dividend payments for six 
years has been asfollows : 



438 



MINNEAPOLIS & ST. LOUIS 







Dividend 


Per cent. 


Dividend 




Year 


Surplus 


Paid on 


Earned on 


Paid on 


Average 






Preferred 


Common 


Common 


Price 


1900-1.... 


$553,762 


5 


5.8 


4 


89 


1901-2.... 


696,724 


5 


8.3 


5 


110 


1902-3.... 


511,915 


5 


5.1 


5 


75 


1903-4.... 


298,078 


5 


1.6 


2 


54 


1904-5. . . . 


257,495 


5 


1. 


- 


70 


1905-6.... 


416,029 


5 


3.6 


— 


75 



It will be seen that from 1901 to 1902 there was a rather sharp 
decline, and in 1904 the dividend payment on the common stock was 
passed, and has not since been resumed. In 1905, for example, 
after the lowest maintenance per mile of any of the years under 
view, the 5% on the preferred was barely earned. 

Dividend Record. 

With the reorganization of the company there were two classes 
of preferred, the first preferred being retired in 1899, bonds being 
substituted. The record of dividend payments is as follows : 





1st 
Preferred 


Preferred 


Common 


1895 


3| (8mo's.) 
5 
5 
2* 


3 
3 

Sole Pref. 
4* 
5 
5 
5 
5 
5 
5 




1896 




1897 




1898 




1899 




1900 


U 


1901 


4 


1902 3 


5 


1904 


2* 


1905 




1906 









The Balance Sheet. 

The balance sheet of the company is not made up in the usual 
form. At the close of the fiscal year of 1906, excluding from the 
current assets the items of securities owned and likewise of material 

on hand, there were net assets of only $ 364,205 

Against this there were liabilities of 1,174,747 

Leaving a debit balance of $ 810,542 

There were deferred assets, including securities on deposit for 
construction borrowings, of $5,842,518, against which there were 
deferred liabilities of $5,454,323. 



MINNEAPOLIS & ST. LOUIS 439 

The item of cash in the current assets was $235,622. It does 
not appear from the balance sheet that the company was in very 
good shape for working capital. 

Investment Value. 

The preferred stock is entitled to 5% non-cumulative dividends, 
and after 5% has been paid on the common, both classes of stock 
share alike. The full 5% on the preferred has been paid for six 
years, and the 5% on the common in both 1901 and 1902. The 
increased surplus shown tended to give a solid appearance to the 
stock, and in 1901 the preferred sold as high as $124 per share, and 
in the boom of 1902, $127. It declined to $80 per share in 1904, 
and in 1906 ranged between $90 and par. 

By reference to the table above it will be seen that in the 
two years of 1904 and 1905 the preferred dividend was barely 
earned, even after low maintenance charges. Even in the generally 
prosperous year of 1906 there was no great margin of surplus after 
the dividend payments. These things considered, the average in- 
vestor will probably not regard the preferred as a very solid 
security, and should high money rates continue, the stock will 
probably tend to sell lower rather than higher. 

Under the 5% dividends paid in 1902 and 1903, the common 
stock sold above par, reaching $115 per share in 1902. When the 
dividend was passed in July of 1904, as it had to be, the stock sold 
down to $40 per share. In 1906 it ruled at generally high prices, 
reaching $84 in the January boom. 

It is difficult to see on what basis these prices were reached 
unless the control of the road could have been picked up in the 
market. It is true that a stock which has recently paid dividends 
tends to sell higher even after dividends are passed than of a 
company with equal earnings on which no dividends have recently 
been paid. The investor will not fail to take note of the fact that 
the surplus shown has declined rather than increased in the largely 
prosperous years of 1905-6, and it is not clear that the extensions of 
the road in progress will tend very materially to swell the sums 
available for dividends. There are on the market a number of non- 
dividend securities with regard to which the reverse is true; that is 
to say, where earnings and surplus have been steadily increasing, 
and where a surplus is shown, after large amounts for improvement 
work have been charged off to operating expenses, and the main- 
tenance figures have been extremely liberal. Some of these stocks 
were selling in 1906 at half the quotations shown for Minneapolis 



440 MINNEAPOLIS & ST. LOUIS 

& St. Louis common. Especially as regards wheat-raising territory, 
which the road reaches, the year of 1906 was of such extraordinary 
prosperity as to make cautious investors apprehensive of its con- 
tinuance. Security buyers of this class probably, therefore, will not 
look upon the showing made by this company as indicating great 
possibilities for its stock. 



MINNEAPOLIS, ST. PAUL AND SAULT STE. 
MARIE RAILROAD. 

The Sault Ste. Marie, or as it is familiarly known, the "Soo," 
is virtually the Canadian Pacific Railway in the United States, the 
latter road owning a majority of its capital stock and guaranteeing 
a large proportion of its bonds. The road has been extending rapidly 
within recent years, and at the close of the fiscal year of 1906 
showed a total mileage of 2,135 miles. 

The road extends from the Falls of Saint Mary, at the extreme 
eastern end of Lake Superior, westward through peninsular Michi- 
gan and northern Wisconsin to Minneapolis and St. Paul, and 
thence northwesterly to Portal, in North Dakota, on the Canadian 
boundary, with extensive branches carrying the line from Glenwood, 
Minn., to Winnipeg; from Hankinson, N. D., through Bismarck to 
Plaza, and from Thief River Falls in northern Minnesota to Ken- 
mare, N. D. 

Both at its eastern, northern and western terminals it meets 
with the lines of the Canadian Pacific, and virtually forms a second 
track for this road through middle Canada into the province of 
Saskatchewan. 

The road is a consolidation, in 1888, of the Minneapolis, Sault 
Ste. Marie & Atlantic, the Minneapolis & St. Croix, the Minne- 
apolis & Pacific, and the Aberdeen, Bismarck & Northwestern. 

During the year of 1906 the Thief River line was opened for 
business, together with several branches in North Dakota, and the 
extensions under way will bring up the length of the road operated 
in 1907 to nearly 2,200 miles. 

Of the mileage operated, 632 miles lie east of Minneapolis ; 
1,483 west. The peculiarity of the road is that the eastern line is 
not profitable, and that the eastern portion is supported out of the 
earnings of the western portion. It follows, therefore, that as the 
western portion is developed, the burdens of the eastern portion be- 
come relatively lighter. 

The last five years have been years of extraordinary prosperity 
for Minnesota and Dakota, and it is this which accounts for the 
favorable change in the fortunes of this road, 

(441) 



442 MINNEAPOLIS, ST. PAUL & SAULT STE. MARIE 

Ownership. 

Slightly more than half of both the common and the preferred 
stock is owned by the Canadian Pacific, together with $3,933,000 
par value of the 4% consolidated bonds. In addition to this the 
Canadian Pacific guarantees 4% interest on all of the outstanding 
bonds assenting to a reduction of interest to this rate. 

Although the road is thus owned outright by the Canadian 
Pacific, and runs in close affiliation with the latter, it is separately 
officered, and only three representatives of the Canadian Pacific 
appear in the directorate. These are Sir Thomas Shaughnessy, 
president of the Canadian Pacific ; Sir William Van Home, chair- 
man of the board, and R. B. Angus, all of Montreal. The other 
directors are Thomas Lowry, president; E. Pennington, vice-presi- 
dent and general manager; W. L. Martin, second vice-president 
and traffic manager; W. D. Washburn, C. H. Pettit, Alfred H. 
Bright and G. R. Newell, of Minneapolis, and E. A. Young, of St. 
Paul. 

Capitalization. 

The capital account on June 30th, 1906, stood as follows : 

Common stock $14,000,000 

Preferred stock 7,000,000 

Total stock $21,000,000 

Funded debt 50,115,000 

Total capital $71,115,000 

Rentals capitalized at 4% 15,339,000 

Approximate capital $86,454,000 

Approximate capitalization per mile $42,800 

Average miles operated 2,020 

Net earnings on net capitalization 6.7% 

Stock on total capitalization 24% 

Fixed charges on total net income 44% 

Factor of safety 56% 

The amount of the securities of the road held in the treasury is 
so small ($441,000) that it has been neglected in the above table. 

It will be seen that the average capitalization per mile for a 
prairie line of the character of the "Soo" is decidedly high, com- 



MINNEAPOLIS, ST. PAUL & SAULT STE. MARIE 443 

paring with $59,512 per mile for the Northern Pacific, $42,362 per 
mile for the Great Northern, and $28,613 for the Canadian Pacific. 

On the face of the returns, and in the extremely prosperous year 
of 1906, the net earnings showed a fair percentage on the estimated 
net capitalization — 6.7%. The figures for the net earnings shown 
by the report, however, were obtained through skimping operating 
charges in a fashion not followed by well-managed American roads. 
Had the maintenance charges for the year been up to the level of 
the usual American practice, the increase would have added from 
three-quarters of a million to a full million dollars to the operating 
expenses, and cut down the net earnings shown by this amount. 

If such a reduction be made, the percentage of net earnings on 
net capitalization would be nearer 5^%, which is a rather low 
figure for a western road. It compares with 10.1% for the Great 
Northern and 10.5% for the Northwestern. 

Nor is the larger part of this capitalization in the form of 
harmless stock. It will be seen that three-quarters of the estimated 
capitalization is interest-bearing debt, or its equivalent, rentals. 
This debt, however, carries a low rate of interest, taxes are light, 
and the fixed charges for 1906 consumed only 44% of the net earn- 
ings shown. Even if the operating expenses had been charged in 
the usual fashion of American roads, with the corresponding re- 
duction in the available net income, the fixed charges for 1906 
would have required only a little more than half of the resulting 
amount, so that on the basis of 1906, the factor of safety for the 
bonded debt amounted to well around 50%. 

Holding very few securities, and having no land grants, the 
equities of the road are negligeable. 

Increase of Capitalization. 

The rapid growth of the line through the Dakotas and into 
Canada has called for a considerable outlay of capital. This has 
been met entirely by the issue of bonds, the capital stock of the road 
not having been increased since the reorganization of the company 
in 1888. 

The comparison of the six years is as follows : 



Year 


Common 
Stock 


Preferred 
Stock 7% 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1899-0 
1905-6 


$14,000,000 
14,000,000 


$7,000,000 
7,000,000 


$33,043,023 
50,115,000 


$54,043,023 
71,115,000 


$5,151,187 
11,574,461 



Increase over six years: Total capital, 30%; gross earnings, 124%. 



444 MINNEAPOLIS, ST. PAUL & SAULT STE. MARIE 

The new constructions in North Dakota have been extremely 
profitable, it being stated that some of the new lines, as, for ex- 
ample, the Winnipeg line, paid from the beginning of operations. 
It is largely these new constructions which have lifted the road to 
its present position. 

Character of Traffic. 

The most considerable single item in the freight movement of 
the road is lumber, amounting to 37%. After this comes grain, 
flour and other mill products amounting to over 30% ; the rest is a 
widely distributed miscellany. Carrying wheat eastward, carrying 
lumber westward, constitute the principal business of the road. 

Passenger earnings bring in about 21% of the gross earnings. 

Stability of Earnings. 

The following table shows the results of operations since 1897. 
It will be seen that in these ten years the mileage has nearly doubled, 
the gross earnings have much more than doubled, and even the earn- 
ings per mile have increased about 75%. 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1897-8 


1,195 
1,272 
1,286 
1,312 
1,396 
1,464 
1,530 
1,774 
2,020 


$4,132,699 
4,348,585 
5,151,187 
4,517,375 
6,222,387 
7,237,264 
6,993,498 
8,716,621 

11,574,461 


$3,458 


1898-9 


3,470 


1899-0 


4,006 


1900-1 


r 3,442 


1901-2 


4,455 


1902-3 


4,943 


1903-4 


4,571 


1904-5 


4,913 


1905-6 


5,728 







The heavy increase of $800 per mile in 1906 is noteworthy. 
Prosperity in the wheat fields seems to run in long cycles, and the 
highly favorable conditions of recent years resulted in 1906 in an- 
other wild "land boom" for the Northwest, through which the 
earnings of the roads in this territory were heavily swollen. This is 
not the sort of traffic that makes for solidity, and the culmination of 
these boom periods is regarded with apprehension by careful in- 
vestors. Nevertheless, it is unquestionably true that the Northwest 
is in a far better shape than it was to meet such bitter years as fol- 
lowed the collapse of the early nineties, and much more able to 
stand a period of depression. 

Another factor to be taken into consideration is that the aver- 
age rate per ton received by the road in 1906 was in excess of the 
rate for the previous year, rising from 72 cents to 78 cents, the 



MINNEAPOLIS, ST. PAUL & SAULT STE. MARIE 445 

difference on the total freight traffic for the year amounting to 
$400,000 in the gross receipts. 

It is to be noted that an increase in rates is not in the general 
line of western railroad development, and that in less prosperous 
days the opposite tendency would probably be shown. 

Maintenance. 

The following shows the sums devoted to maintenance over a 
period of six years : 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


407,687 
442,511 
482,083 
443,510 
497,455 
536,606 


$472 
490 
547 
461 
419 
505 


$363 
374 
450 

477 
497 
539 


$835 
864 
997 
938 
916 

1,044 


Average. . . 


468,308 


$482 


$450 


$932 


Can. Pac 

Gt. Nor. 

Nor. Pac 


458,589 
650,321 
729,102 


850 

960 

1,300 


1,002 
594 
791 


1,852 

fl,554 

2,091 



It will be seen that with an average traffic density about the 
same as that of the Canadian Pacific, the average maintenance 
charges in 1906 for the "Soo" were about $800 per mile less. This 
is a very considerable figure, and on over two thousand miles of 
operated road would make a deep cut into the nominal surplus shown 
in the report. Furthermore, it was shown in the discussion on the 
Canadian Pacific's maintenance, that the charges of that road are 
rather below those of other Pacific roads, with the possible excep- 
tion of the Great Northern. 

At the most conservative estimate, the maintenance charges for 
1906 would have been at least 50% higher than they were, or a 
difference of $500 per mile, if the usual practice of American roads 
had been followed. This difference of $500 per mile would have 
meant the addition of $1,000,000 to the operating expenses. 

The figures shown for the operating expenses appear to add 
further testimony of inadequate maintenance. In the face of the fact 
that the average of operating expenses for all the roads of the 
United States is about 68%, and that on some of the best managed 
roads of the country they are above 70%, an operating ratio of 50% 
seems absurd. It will generally be found that, as in the case of 



446 MINNEAPOLIS, ST. PAUL & SAULT STE. MARIE 

the "Soo," it is secured by insufficient appropriations for the up- 
keep of the road. Had $1,000,000 been added to the operating ex- 
penses, the latter would have been increased by nearly one-fifth, 
and the operating ratio brought up accordingly to about 60%, 
still a low figure. 

Improvements. 

Nor have the insufficient maintenance charges been offset by 
large sums in special appropriations from the nominal surplus 
shown. The amount for 1901-2 was $300,000; for 1903, $200,000; 
for 1904, $250,000; and no appropriation at all was made in 1905. 
From the surplus of 1906, $1,050,000 was set aside for the improve- 
ment fund, which is just about the amount here estimated as re- 
quired for adequate maintenance. 

Surplus Earnings. 

The sums devoted in previous years to improvements were quite 
insufficient to bring the maintenance charges up to the usual 
American standard, and in order to do this, there would therefore 
be further reductions from the items of surplus earnings shown 
below. The nominal surpluses shown by the company, charging its 
operating expenses after the fashion indicated, have been for six 
years, as follows: 







Dividends 


Per cent. 


Dividends 


Average 
Price 

(Calendar 
Year) 


Year 


Surplus 


Paid on 
preferred 


Earned on 
Common 


Paid on 
Common 


1900-1 


$ 327,873 


— 


— 


— 


20 


1901-2 


1,586,501 


— 


7.8 


— 


25 


1902-3 


1,664,497 


7 


8.4 


2 


60 


1903-4 


1,387,246 


7 


6.4 


4 


60 


1904-5 


2,063,415 


7 


11.2 


4 


75 


1905-6 


3,267,686 


7 


19.8 


4 


117 



On the theory that an average of three-quarters of a million 
dollars might have been annually turned back into the road in the 
six years under view, without doing it any harm, the average sur- 
plus up to 1906 would have about paid the full 7% dividend on the 
preferred stock, but have left very little for the common — scarcely 
enough to have justified a dividend before the year of 1905. 

But the year of 1906 was one of exceptional prosperity for 
the road, and even if a full million dollars had been added to the 
operating expenses for maintenance, there would have still re- 
mained a sufficient surplus to enable the road to set aside the 



MINNEAPOLIS, ST. PAUL & SAULT STE. MARIE 447 

$1,050,000 which it did for improvement fund, pay its full 7% on 
the preferred, and still leave between 8% and 9% for the common. 
Should this prosperity continue, the directors could conservatively 
put the road on a 6% basis and still leave something over for the 
credit of profit and loss. 

The full dividends on the preferred have been paid, beginning 
from 1903, and the same year 2% was paid on the common, and 
4% since that time. 

The Balance Sheet. 

At the close of the fiscal year of 1906 the road showed current 
assets of $4,230,857 ; current liabilities, including interest and taxes, 
and car trust notes ($40,184) of $2,756,871, leaving a working 
balance of $1,473,986. 

The item of cash was exceptionally large, amounting to $3,176,- 
580. 

The amount to the credit of profit and loss (itemized as in- 
come account) was $5,413,109. 

This showed the road in excellent condition with regard to its 
working capital. 

Investment Value. 

The rise in the stocks of the road since 1900 has been very 
rapid, corresponding to the improved earnings and the increased 
business, due to the extension of the road into the Northwest. In 
1900 the preferred sold as low as $47 per share, rising to $139 in 
1902, declining to $109 in the following year, and rising to a record 
figure of $183 in January of 1906. It sold at $123 in March, 1907. 

The preferred stock is entitled to non-cumulative dividends up 
to 7%, and then after 7% has been paid on the common, it shares 
equally with the latter. Inasmuch as absolute control is held by the 
Canadian Pacific, the balance of the stock has no value otherwise 
than as an investment. Should the Northwest undergo no serious 
setback as came in the nineties, it would not be long, at the present 
rate of increase, before the full 7% was being paid on the common. 
There would then be a prospect for a further increase in the pre- 
ferred dividend. Under the parentage of such a great, powerful 
system as the Canadian Pacific, the road is in an exceptionally favor- 
able situation both for the maintenance of its traffic and the financing 
of such new issues as may be required for extensions, at favorable 
rates. 

The cautious investor, however, will probably consider that the 
larger part of the earning power of the road lies in a country that 



448 MINNEAPOLIS, ST. PAUL & SAUI/T STE. MARIE 

has been settled very rapidly, within a few years, and that it would 
not be at all surprising if the road failed to show so rapid an increase 
in the coming five years as in the previous period. In other words, 
the stock presents a considerable speculative risk, and is scarcely 
entitled to sell as high, on the basis of its present earnings, as the 
stocks of other roads which have added less mileage in recent years, 
and cover a more stable and settled territory. 

The rise in the price of the common stock has been equally 
rapid. It sold as low as $14 per share in 1900, rising to $84 in 1902, 
and declining to $42 in 1903. In 1905 it rose to $145, touching the 
record price of $164 in March of 1906. In May of 1907, it soli 
at $90. 

The average price for 1906 was above $150, and this for a 4% 
stock could only have been made in anticipation of a very consider- 
able increase in the dividend. The 19% which the figures for 1906 
show as earned on the common, over and above the preferred divi- 
dend, were, as has been explained already, somewhat delusive, and 
it seems doubtful if a conservative policy such as characterizes the 
Canadian Pacific, would justify more than a 6% dividend at the 
present time. On a 6% basis 'it is not clear that the stock should 
sell for more than does the Pennsylvania, and in comparison with 
this and other roads, the figures for 1906 seem very high. A 50% 
increase in dividend is considerable, and not generally undertaken on 
a single year, or even two years, of exceptional prosperity. 

Considering its ownership, its management, and its excellent 
prospects, investors who look rather to the possible increase in the 
value of the stock than the actual return they receive in dividends, 
would doubtless regard the stock as an attractive purchase at some- 
where around the low price of 1907. But the western territory into 
which the road reaches has been the scene of very heavy railroad 
extensions within the last few years, and unless the era of de- 
pressions has gone by, it is scarcely possible that the flush conditions 
in these states will undergo no check. 

While the unexpected may always happen, for those who seek 
a safe place for their money, an extra degree of caution will scarcely 
go amiss in considering the securities of companies like this. The 
stock is attractive rather to speculative buyers of the type willing 
to take large chances for the sake of large possible gains. 



MISSOURI, KANSAS AND TEX AS^ RAILWAY. 

Some years ago, the Missouri, Kansas & Texas — the "Katy/ 
as it is familiarly known, was set down, in a work on American 
railroads, as a road of the "nowhere to nowhere" variety. In ten 
years, however, its situation has very materially changed, and it is 
now a well organized north and south road from Missouri and 
Kansas to the Gulf, and a line towards which several of the larger 
systems cast covetous eyes. It runs through a rich and growing ter- 
ritory, but it was long handicapped by a heavy burden of debt, the 
legacy of a reckless or dishonest management. Spite of this, it has 
struggled through and was able to pay, in 1906, on its preferred 
stock the first dividend in its history. 

History. 

The Missouri, Kansas & Texas was organized in 1870, through 
the consolidation of the southern branch of the Union Pacific and 
several small lines operating in southern Missouri. Partly by absorp- 
tion of other small lines, partly by new construction, the line was 
extended southward through Indian Territory, being aided by large 
land grants, aggregating one million acres, in Kansas and Indian 
Territory. In 1880, then operating 879 miles, it came under the 
Gould influence, and was leased to the Missouri Pacific. The resuit 
was disastrous to the road, it being managed for the benefit of the 
lessor company. A large floating debt was run up, maintenance 
neglected, and the property reduced to a deplorable condition. In 
1888 it defaulted its interest payments, and in the process of reor- 
ganization it escaped from the Gould domination. 

Conditions required a drastic plan of reorganization, but this 
was not followed out. Practically no new capital was provided, 
and it was under this heavy handicap that the new management, 
under the presidency of Henry C. Rouse, undertook the upbuilding 
of the road. In ten years, 900 miles have been added to the system, 
and its lines now reach from St. Louis, Hannibal and Kansas City 
on the north, to San Antonio and Galveston on the south, with 
numerous branches. Much of the old track has been relaid, con- 

2 a (449) 



450 MISSOURI, KANSAS & TEXAS 

sickrable sums have been set aside from surplus for improvements, 
and in 1906 the road closed the most prosperous year of its existence. 

The M., K. & T. has been a highly independent road, and has 
practically no affiliations with other systems. Up to 1904-5, the 
Rockefeller interests were supposed to be dominant in the road, 
John D. Rockefeller and William Rockefeller being included in its 
directorate, and Colgate Hoyt, associated in the Rockefeller interests, 
was for some time vice-president of the road. All of these three 
have disappeared from the directorate, which now includes no 
prominent representative of the Standard Oil interests. 

Upon the death, in 1906, of Henry C. Rouse, long president 
and later chairman of the board, Adrian H. Joline, for some years 
general counsel of the Toledo & Southwestern, who came to the 
M., K. & T. as its general counsel, became chairman and later presi- 
dent of the road. In 1906 the directorate included Mr. Joline and 
five of the operating officers of the road: F. M. Finney, then presi- 
dent ; A. A. Allen, vice-president and general manager ; Charles C. 
Hedge, vice-president and treasurer; R. W. Maguire, comptroller, 
and James Hagerman, general counsel. The rest of the board was 
made up by Henry W. Poor, of H. W. Poor & Co., bankers, New 
York ; A. J. Poor, of Chapman, Kansas ; James Brown Potter, a 
New York lawyer and capitalist; ex-Governor Myron T. Herrick 
and Otto Miller, of Cleveland, Ohio ; B. P. McDonald, Fort Scott, 
and E. B. Stevens, of Parsons, Kansas ; H. J. de Marez Oyens, Am- 
sterdam, Holland, and Alfred Waldron Smithers, London, England. 

In 1905 the road reported 1,509 shareholders. 

Capitalization. 

On June 30th, 1906, the capital account stood as follows : 

Common stock $ 63,300,300 

Preferred stock 13,000,000 

Other stock 3,922,500 

Total $ 80,222,800 

Mortgage bonds 104,234,000 

Equipment bonds 240,732 

Nominal capital $ 184,697,532 

Rentals capital at 4% 11,487,500 

Approximate capital $ 196,185,032 



MISSOURI, KANSAS & TEXAS 451 

Approximate capitalization per mile .... $64,470 

Miles operated 3,043 

Net earnings on net capital 3.3% 

Stock on net capital 41% 

Fixed charges on total net income 75% 

Factor of safety 25% 

In the estimate of capitalization the company's treasury hold- 
ings are too small to be considered. It will be seen that the estimated 
capitalization per mile is high for a "prairie road." Its $64,470 per 
mile compares with $30,725 per mile for the Missouri Pacific, and 
with $46,710 per mile for the St. Louis & San Francisco, occupying 
much the same territory. 

The high capitalization is further reflected in the showing of the 
net earnings on the estimated capitalization, amounting to only 3.3%. 
This figure stands against 7.7% for the Missouri Pacific, and against 
4.8% for the St. Louis & San Francisco. Moreover, the heavy capi- 
talization of the road is not represented in the form of harmless 
stock; but bonded debt is high, and the stock represents only 41% 
of the estimated capitalization of the road. 

The burden under which the road has struggled so long is still 
further reflected in the relation of fixed charges to the total net 
income. Fixed charges for a long time practically consumed all of 
the earnings of the road, and even in the unusually prosperous year 
of 1906, required 75% of the total net income. 

The nominal factor of safety on the securities of the road, even 
in the exceptional year of 1906, amounted to only 25%. 

The company has practically no holdings in other companies, 
and therefore has no outside equities to add to its assets. 

Increase of Capitalization. 

In six years the total capital increased 27%, and the gross earn- 
ings 70%, a very substantial difference, indicating steady progress 
towards better conditions. The items of increase were as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1900 
1906 


$55,181,000 
63,300,300 


$13,000,000 $73,523,000 
3,012,500 
13,000,000 104,234,000 

3,922,5001 240,732 

i 


$144,716,500 
184,097,532 


$12,626,511 
21,159,144 



452 



MISSOURI, KANSAS & TEXAS 
Character of Traffic. 



The most considerable item in the traffic of the road is coal, 
which in 1906 amounted to over one-quarter of the total tonnage; 
lumber made up 10%, farm products and animals about 30%, manu- 
factures, 18%. Of farm products, cotton made up only 4^2% of the 
gross. 

Passenger earnings contributed 25% of the gross earnings of 
the road. 

It will be seen that the traffic is widely distributed, and reflects 
the varied character of the territory of the road. 

Stability of Earnings. 

As the table reveals, the gross earnings have about doubled in 
ten years, while the mileage operated has increasel only 50%. The 
result has been an increase in the gross earnings per mile from 
$5,140 to $6,953. The new mileage has tended to reduce the average 
earnings per mile from 1901 to 1906. 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


2,147 
2,197 
2,197 
2,200 
2,218 
2,265 
2,500 
2,601 
2,884 
3,043 
3,043 


$11,036,987 
11,478,315 
12,047,237 
11,930,334 
12,626,512 
15,403,083 
16,391,400 
17,208,193 
17,766,595 
20,041,095 
21,159,144 


$5,140 


1896-7 


5,224 


1897-8 


5,483 


1898-9 


5,424 


1899-0 


5,692 


1900-1 


6,800 


1901-2 


6,556 


1902-3.. 


6,616 


1903-4 

1904-5 

1905-6 


6,160 
6,586 
6,953 







Maintenance. 

The efforts of the management of the road have been to bring 
it up to a much higher standard of efficiency, and in pursuance of 
this policy, the maintenance charges have been as heavy as the 
earnings of the road would justify. The items are as follows : 



Year 


Traffic Density 


Maintenanc 


;e per Mile 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


576,023 

558,684 
531,477 
426,431 
418,385 
460,359 


$1,243 
1,058 
1,068 
733 
1,197 
1,231 


$601 
599 
634 
559 
632 
671 


$1,844 
1,657 
1,702 
1,492 
1,829 
1,902 


Average. . . . 


495,226 


$1,121 


$616 


$1,737 



MISSOURI, KANSAS & TEXAS 



453 



St. L. & S. F. 
St. L. S. W... 

K. C. Sou 

Atchison 



448,625 
408,066 
837,406 
577,005 




1,517 
1,697 
2,117 
2,236 



The average of $1,100 per mile for maintenance of way on a 
road with a traffic density of 495,000 ton-mile per mile of road re- 
flects this policy. The average of $616 per mile for maintenance 
of equipment is rather low, but in addition to the regular mainten- 
ance, the following amounts have been appropriated from surplus 
earnings for new equipment : 

1902-3 $1,160,800 

1903-4 1,353,900 

1904-5 1,238,200 

1905-6 594,700 



$4,347,600 



The report does not specify the separate items of repairs, but 
during the year the road added thirty new locomotives and 2,200 
new freight cars. These, however, were not paid for from earnings. 

Surplus Earnings. 

The surplus shown has steadily increased, so that in 1906 a 2% 
dividend for the half year was paid on the preferred stock, the 
beginning, it is hoped, of steady dividends to the full 4% the stock 
is entitled to. It is to be noted, however, that had the same sums 
been set aside for new equipment from earnings as in the three pre- 
ceding years, the full dividend on the preferred could not have been 
paid. In the table below the per cent, of earnings is shown on the 
preferred stock, and before any payment has been made for equip- 
ment appropriations. After deducting $594,000 from the surplus, 
the percentage earned on preferred in 1906 was only 8.1%. 



Year 


Surplus 


Dividends 

Paid on 

Preferred 


Per cent. 
Earned on 
Preferred 




$799,916 
908,940 
1,099,916 
1,066,368 
1,267,191 
1,653,087 




6.1 




6.9 






8.4 






8.2 






9.7 






4 


12.7 



1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



454 MISSOURI, KANSAS & TEXAS 

In 1906 and in the three years preceding, before any deduc- 
tions were made the surplus showed about 1% annually on the 
common stock, over and above the full 4% dividend on the pre- 
ferred. 

The Balance Sheet. 

At the close of the fiscal year of 1906, the balance sheet showed : 

Current assets of $4,091,969 

Current liabilities of 1,957,378 

Leaving a working balance of $2,134,591 

In addition to the items of current liabilities, there were taxes 
and interest accrued, but not due, amounting to $1,631,806. 

The amount to credit of profit and loss was $1,739,314. 

Investment Value. 

In anticipation of a dividend, M., K. & T. preferred sold up' to 
$69 per share in 1902, declining, however, to $32 in 1904. It rose 
to $74 in January, 1906, which is the highest figure it has yet 
reached. 

It has already been noted that the first semi-annual dividend 
of 2^4% on the preferred, paid in 1906, was more or less at the ex- 
pense of a reduction of the amounts previously appropriated for new 
equipment. It is this fact probably which accounts for the failure 
of the stock to rise to a higher figure upon the beginning of divi- 
dends. If, however, the earnings of the road should continue to 
increase in the same favorable ratio as in the last five years, the 
margin of safety for the dividends on this stock would be steadily 
enlarged, and even at the highest figures of 1906 would represent 
a fairly attractive investment. If, however, on a surplus showing 
not greatly inferior to that of 1906, the stock could sell off in the 
general decline of 1903-4 to $32 per share, it is not unreasonable to 
suppose that should another decline come, it would go much below 
the high figures of 1906. 

Reviewing the steady progress of the road, considering its 
excellent management, and the rapidly developing resources of its 
territory, and especially of the new state of Oklahoma, the far 
sighted investor will probably conclude that if purchased on reces- 
sions and put away, the stock should yield a handsome profit in a 
few years. Nothing apparently but a decline in prosperity over 
the whole country, could materially affect the earning power of the 



MISSOURI, KANSAS & TEXAS 455 

road. The payment of the equipment trusts through the issue of 
bonds will eventually effect a considerable saving to the road, and 
should contribute to the safety of the dividend on the preferred. 

The amount of the preferred stock is small, while that of the 
common is comparatively large. A surplus, therefore, which would 
represent a very considerable degree of safety for the preferred 
dividend would not readily lend itself to the payment of a dividend 
on the common. Moreover, if the conservative policy of the road, 
in returning a considerable portion of the surplus towards better- 
ments, should be continued, it would be some time before a dividend 
on the common should reasonably be expected. 

It may be taken, therefore, that the common stock is of value 
only for a long pull investment ; but, on the other hand, M., K. & T. 
is one of the "low-priced" stocks, which, like the Denver & Rio 
Grande, the Erie and others, fluctuate within wide limits, according 
to the general conditions of the money market. For example, in 
1901-2 it sold up to $35 per share, slumping off to less than $15 in 
1904. It was run up to $40 per share in the general rise of 1906. 
To all practical intents it has had as much value in one year as in 
another. If on a general decline it should sell down to anything 
like the figures of 1903-4, that is to say, below $20 a share, it would 
undoubtedly present an attractive speculation, and unless there were 
a very long depression like that of 1893-7, it would probably rise 
again with the general improvement of the market. Bought as an 
investment at something like these figures, and held for a number 
of years, it would probably show a good profit to its holder; but 
as an investment without regard to the eccentricities of the stock 
market, it would probably be generally regarded as inferior to the 
preferred. 



MISSOURI PACIFIC RAILWAY. 

The Missouri Pacific is the chief of the Gould railways and 
the head of the vast system of lines which gridirons the interior 
southwest lying between the Mississippi and tke Rockies, and extend- 
ing into Colorado and to the Great Salt Lake. 

The Missouri Pacific operates directly over six thousand miles 
of railroad, the make-up of the main "Gould Systems" standing as 
follows : 

Miles. 

Missouri Pacific 6,276 

St. Louis Southwestern 1,452 

Texas & Pacific 1,826 

International & Great Northern 1,160 

Denver & Rio Grande 2,477 

Rio Grande Southern 180 

Total miles 13,371 

To these may be added the Wabash and the Wabash & Pitts- 
burg Terminal, the Wheeling & Lake Erie, and the Western Mary- 
land, with 3,600 miles more, which brings the total of Gould mileage 
up to nearly 17,000 miles. With the completion of the Western 
Pacific, the total will reach over 18,000 miles. The Gould lines com- 
prise one of the five largest systems in the country under practically 
single control, and when the Western Pacific is completed they will 
make up the only transcontinental line in the United States under 
practically one ownership. 

History. 

The present company was the consolidation in 1880 of the 
Missouri Pacific and several minor roads. The original line, the 
Pacific Railway of Missouri, was chartered as far back as 1849, to 
build from St. Louis to Kansas City, receiving an advance from 
the state of seven million dollars, in addition to a land grant of about 
sixteen hundred thousand acres. The line was not completed to 
Kansas City until 1865. In 1876 the road was sold under foreclosure 
and came under the control of Gould interests and has since so 

(456) 



MISSOURI PACIFIC 457 

remained. In 1881 the Missouri Pacific practically absorbed the St. 
Louis, Iron Mountain & Southern, and for a time operated the 
Missouri, Kansas & Texas, the Texas & Pacific and other roads 
under leases, these leases being afterwards surrendered. In 1892 
complete control of the International & Great Northern was secured, 
and of the Central Branch of the Union Pacific in 1898-9, the latter 
road being now operated as a part of the Missouri Pacific system. 
In 1901 a large interest in the Denver & Rio Grande was acquired, 
sufficient, with the Rockefeller holdings, it is understood, to ensure 
control of that property. 

The peculiarity of the company is that the Missouri Pacific 
proper is a minor part of the system, the latter contributing only 
fifteen millions of the gross earnings as against over twenty-one 
millions for the St. Louis & Iron Mountain, the balance of the gross 
being supplied by branch lines, of which the chief is the Kansas & 
Colorado Pacific. 

The Missouri Pacific and branch lines extend from St. Louis 
westerly to Pueblo in Colorado, where they join the Rio Grande 
with a network of branching lines in eastern Kansas and western 
Missouri. The Iron Mountain lines lead southerly from St. Louis to 
Texarkana in Texas, and Alexandria in Louisiana, at both of which 
points they join the Texas & Pacific. Throughout the most of its 
length the Iron Mountain nearly parallels the St. Louis & South- 
western. 

The "watergrade" line from St. Louis to New Orleans (in 
connection with the Texas & Pacific) was completed in 1906. 

Ownership. 

The directing head of the Gould lines and president of the 
Missouri Pacific, the Texas & Pacific and other lines is George Jay 
Gould, and Gould interests control the property absolutely. The 
directorate of 1906 was made up of George Jay Gould, Frank Jay 
Gould, vice-president, Edwin Gould, president of the St. Louis 
Southwestern ; Howard Gould and Charles S. Clarke, vice-president, 
St. Louis, Mo., directly representing the Gould interests. 

The Rockefeller interests were represented by Frederick T. 
Gates. John D. Rockefeller, Jr., having retired from the directorate 
in 1905, his place was taken by James Henry Smith, of New York, 
one of the chief owners of the St. Paul, and representative of the 
George Smith Estate. The other directors were: Samuel Sloan, 
formerly president and now chairman of the board of man- 



458 MISSOURI PACIFIC 

agers of the Lackawanna; S. Davies Warfield, of Baltimore; W. 
K. Bixby, and O. L. Garrison, of St. Louis, and James H. Hyde, 
representing the Hyde estate of New York. 

The executive committee was made up of George, Frank and 
Edwin Gould, F. T. Gates, James Henry Smith, Samuel Sloan and 
S. Davies Warfield. In 1907, Stuyvesant Fish, late president of the 
Illinois Central, entered the board and the executive committee, 
taking the place of J. H. Smith, deceased. 

The St. Louis & Iron Mountain, of which the Missouri Pacific 
owns practically all of the capital stock, has a separate directorate 
made up entirely in the Gould interest. The same is true of the 
Central Branch Railway. 

The stock of the Missouri Pacific is not widely held, the road 
reporting in 1905 only 1,861 stockholders, as against 17,500 for the 
Atchison, and 14,000 for the Union Pacific. 

Capitalization. 

The Missouri Pacific reports are exceptionally full in some re- 
gards, quite unsatisfactory in others, in particular the exhibit as 
to the income account. Some six millions of gross earnings on the 
"Branch Lines," are not itemized; and against it, it is difficult to 
segregate the stocks and bonds of the roads reported in the earnings 
of the "system." Deducting from the book value of securities owned 
by all the component companies, the stocks of the Iron Mountain 
and the Central Branch, the capital account, June 30th, 1906, stood 
about as follows (The net amount paid for rentals of leased lines, 
after deducting rentals received, was very small, and need not be 
taken into consideration) : 

Capital stock $ 77,817,875 

St. L., I. M. & S. (balance outstanding) 51,973 
Funded Debt — 

Missouri Pacific -. 85,012,000 

St. L., I. M. & S 97,873,304 

Central Branch 5,959,000 

Leased Lines 4,012,000 

Equipment obligations (total) 12,906,000 

Gross capital $283,632,152 

Securities held (including St. L. & I. M. 

S. holdings) 84,801,285 

Approximate net capital $198,830,867 



MISSOURI PACIFIC 459 

Approximate net capital, per mile $30,725 

Average miles operated 6,276 

Net earnings on net capitalization 7.7% 

Stock on net capitalization 39% 

Fixed charges on total net income 60% 

Factor of Safety 40% 

It will be seen that the gross capitalization of the Missouri 
Pacific system amounts to about $45,000 per mile, but both the 
Missouri Pacific proper and the St. Louis & Iron Mountain hold 
large quantities of securities carried on the books at a cost of $136,- 
000,000. From this may be deducted $7,585,000 par value of the 
stock of the Central Branch Railway; and the Iron Mountain 
stock of $44,000,000 par value, originally exchanged in 1881 on the 
basis of three shares of Missouri Pacific stock for four shares of the 
Iron Mountain. The Iron Mountain earned in 1906 over 9% on 
its capital stock, practically all of which was turned into the treasury 
of the Missouri Pacific. This stock is therefore a valuable asset 
and is probably carried upon the books at below its market worth. 

On the other securities owned by the two companies, there were 
received over $3,500,000 in dividends and interest in 1906, which, on 
the balance of $84,801,285, nominal book value of these securities 
after deducting the par value of the two stocks noted, amounted to 
well over 4%. These large holdings therefore are apparently well 
worth the amount at which they are carried on the books of the 
company, and may legitimately be deducted from the gross capitali- 
zation of the system. 

When these deductions are made it will be seen that the capitali- 
zation of the system per mile is comparatively low, amounting to 
only $30,725, comparing with a similar estimate of $64,470 per mile 
for the M., K. & T., of $58,887 per mile for the Atchison, and $46,- 
710 per mile for the St. Louis & San Francisco, companies occupying 
very much the same sort of territory as the Missouri Pacific. The 
fact as to this low capitalization is directly contrary to the general 
impression, which regards the Gould roads as usually much over- 
capitalized. 

On this estimate of net capitalization, the net earnings of the 
system represented 7.7%, as against similar estimates of 3.3% for 
the M., K. & T., 5.9% for the Atchison, and 4.8% for the St. Louis 
& San Francisco. 

Of the estimated net capitalization the stock of the Missouri 
Pacific represents a little over one-half, and of the total net income 



460 MISSOURI PACIFIC 

derived from the operation of the combined roads, 60% is con- 
sumed by fixed charges, indicating a generally high rate of interest 
on the bonded debt. The factor of safety for all the underlying 
securities of the system would on this estimate be 40%. 

Equities Owned. 

Aside from the $44,000,000 of Iron Mountain stock already 
discussed, the most valuable single asset held in the treasury of the 
two companies is $23,668,000 par value of the second mortgage 
income bonds of the Texas & Pacific Railway, on which the holding 
roads received, in 1906, the full 5% to which the bonds were 
entitled. 

These bonds were exchanged for an equivalent of 65% of the 
St. Louis & Iron Mountain gold bonds, so that the Iron Mountain 
is paying 4% and receiving the equivalent of 7^%, which, if the 
rate of payment can be maintained, would add 50% to the cost 
valuation of these bonds. 

All the stock of the Central Branch Railway, amounting to 
$7,585,000, is held by the Missouri Pacific, and from this road the 
Missouri Pacific received, in 1906, in dividends, $1,061,900. This 
was, however, a payment from surplus, and the net surplus available 
for dividend over all fixed charges shown by the Central Branch in 
1906 was $1,402,000, equivalent to 5% on the face value of the stock. 
The other items of income were widely distributed over a mass of 
securities which are listed in full in the report, but not itemized as 
to their cost, save as to total. Practically all the earnings to which 
these stocks are entitled are received by the holding companies, so 
that the latter have no extensive equities unrealized. 

On the Denver stock, 5% is paid on the $7,300,000 par value of 
the preferred, making the average return on the purchase a little 
over 2 1 / 2 ( fo, but in view of the prosperity of the road there should 
be some increment in value over the cost price. 

Increase of Capitalization. 

Since 1900 both stock and funded debt have increased about 
50%. In the same period gross earnings have increased only 46%. 
A considerable part of the increase both in stock and bonds has been 
applied to the purchase of the securities of other roads, as the 
Denver and Wabash stocks and the Wabash debentures, so that in 
reality the gross earnings of the system have increased more than 
the net increase of the capitalization. The items stand as follows : 



MISSOURI PACIFIC 



461 



Year 


Common 
Stock 


Funded 
Debt (System) 


Total 
Capital 


Gross 
Earnings 


1900 

1906 


$50,432,150 

77,817,875 


$138,539,556 
205,862,505 


$188,771,706 
283,680,380 


$30,511,313 
44,566,821 



Increase over six years: Total capital, 50%; gross earnings, 46%. 

Of this increase about $31,000,000 was represented by the sale 
of $6,000,000 of 5% two-year notes in 1904, and, in 1905, of $25,- 
000,000 of new 4% forty-year gold bonds, covered by a deposit with 
the trustees of $25,000,000 of the capital stock of the Iron Moun- 
tain. These issues were for the purchase of additional terminal 
properties and to acquire and construct 677 miles of railway, mainly 
towards the completion of the low grade line from St. Louis to 
New Orleans. 

The construction of this line should prove a great advantage to 
the road, and forms part of that added competition which the Gulf 
lines are showing towards the eastern trunk lines in securing grain 
and other traffic from the Middle West. 

Character of Traffic. 

The Missouri Pacific does not itemize its freight tonnage, but 
the report for 1906 shows that the average rate per ton-mile was 
slightly below the average rate for the previous year. At least a 
part of this may be ascribed to the low grain rates to Gulf ports 
which the Missouri Pacific made in the grain moving season of 
1905-6. This apparently did not turn out to be a satisfactory move, 
for the roads were otherwise well supplied with tonnage, and it is 
possible, had these rates not been made, the earnings for the year 
of 1906 would have been higher. 

Stability of Earnings. 

Through a series of years the earnings of the system have 
shown as follows : 



IK 

Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896 


4,938 
4,938 
4,938 
4,938 
4,938 
5,555 
5,613 
5,846 
6,140 
3,204 
0,276 


$22,011,961 
24,805,451 
26,744,823 
28,079,820 
30,511,313 
36,661,094 
37,495,688 
43,095,769 
43,693,617 
41,067,282 
44,566,821 


$4,457 


1897 


5,023 


1898 

1899 


5,417 

5,281 


1900 


6,179 


1901 


6,600 


1902 

1903 

1904 


6,680 
7,372 
7,116 


1904-5 


6,618 


1905-6 


7,101 







462 



MISSOURI PACIFIC 



It will be seen that in the ten and a half years under view, the 
mileage has increased about 25%, while the gross earnings have 
doubled. The earnings per mile have increased about 60%. In the 
above table the earnings are given both for the calendar year of 
1904 and for the fiscal year of 1904-5, the road's fiscal year having 
been changed within this period. It will be seen that the earnings 
for 1904-5 showed some decrease for the earnings for the calendar 
year of 1904, due in part to the decline in traffic from the business 
of the year of the World's Fair at St. Louis. 

The earnings for 1905-6 showed a considerable increase over the 
previous fiscal year, however, and this occurred with but a very 
slight increase in the cost of conducting transportation ; a fact which 
occasioned some unfavorable comment and inquiry as to how this 
apparently anomalous result could be brought about. It will be seen 
further that the earnings per mile reached their maximum in the 
year of 1903, so that the extensions since that year have tended to 
reduce rather than raise the average earnings per operated mile. 

It may be noted further that the earnings per mile on the Mis- 
souri Pacific have shown nothing like the increase which has been 
shown, for example, by the Atchison, where the mileage earnings 
practically doubled within the period named. 



Maintenance. 

Up to the report issued in 1906 no itemization had been made 
in the expense account of the Missouri Pacific system, but in the 
1906 report these items were shown both for the year of 1906 and 
the previous year. They were as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1905 


578,823 
668,791 


$782 
856 


$722 
921 


$1,504 


1906 


1,777 






Average. . . . 


623,807 


$869 


$821 


$1,690 


Atch. (2 y. av. ) 
M. K. & T. " 
St.L & S.F. " 
Burlington " 


631,700 
439,300 
426,254 
652,198 


1,424 

1,214 

756 

1,148 


1,294 
651 
725 

1,318 


2,718 
1,865 
1,481 
2,466 



Comparison for the same two years is introduced from com- 
peting lines; these show that with less earnings per mile and not 
more than two-thirds of the traffic density, the total maintenance 



MISSOURI PACIFIC 463 

charges of the M., K. & T. were more than $200 per mile in excess 
of those of the Missouri Pacific. Again, with about the same traffic 
density, but considerably higher mileage earnings, the total main- 
tenance charges on the Atchison were more than one thousand 
dollars per mile higher in these two years than the Missouri Pacific's. 
The Missouri, Kansas & Texas has been heavily handicapped by 
heavy charges and lack of capital, and its charges were low. It is 
anomalous that with 30% less traffic density its charges should still 
have been higher than the Missouri Pacific's. 

A better comparison may be made with the Atchison. Its 
traffic density was about the same as the Missouri Pacific's, but its 
mileage earnings were considerably higher. Had the Missouri Pa- 
cific expended the same amounts for maintenance as the Atchison 
on an equal basis of mileage earnings, this would have added nearly 
$500 per mile to the Missouri Pacific's charges, and this on the 
6,276 miles of railroad would have increased these charges by 
about $3,100,000, or about 30%. The $6,309,000 of surplus shown 
by the Missouri Pacific system for 1906 would have been cut down 
nearly by half. Instead of showing a surplus equal to 8.1% on 
the capital stock, the road would have shown only about 4%, or an 
amount insufficient to meet the 5% dividend. 

Improvements. 

Moreover, while the Atchison has been steadily setting aside 
from its surplus, sums for improvements, amounting in six 
years to nearly $16,000,000, the only sums set aside from surplus 
by the Missouri Pacific in the same period have been as follows : 

1901 $ 2,608,657 

1902 2,615,871 

1903 1,249,672 

Total $ 6,474,200 

The report for 1906 shows no such sums devoted in the fiscal 
years of 1905 or 1906. 

In 1906 Atchison common was put upon a 5% basis, the same as 
the Missouri Pacific's basis. In estimating the value of the two 
stocks the investor therefore will take into consideration that where 
the Atchison has shown heavy maintenance charges and large sums 
for improvements, the Missouri Pacific has shown maintenance of 
$1,000 a year less, with about the same traffic density, and set aside 



464 



MISSOURI PACIFIC 



very small sums for improvements. It is probably the same fact 
which explains in part why the Atchison's earnings have increased 
so much more rapidly per mile than the Missouri Pacific's, 
follows : 

Surplus Earnings. 

The surplus shown for each year since 1900 has been as 



Year 



Surplus 



Per cent. 

Earned on 

Common 



Dividends 
Paid on 
Common 



Average 
Price 



1900.. 
1901.. 
1902.. 
1903. . 
1904.. 
1904-5 
1905-6 



$3,779,020 
7,478,523 
6,544,622 
7,586,493 
5,925,634 
5,432,177 
6,329,014 



4.9 
9.7 
8.4 
9.7 
7.6 
6.9 
8.1 



2* 

5 
5 
5 
5 
5 



55 
96 
106 
100 
99 
95 
96 



In the above table it will be seen that both the calendar year 
for 1904 and the fiscal year of 1904-5 are shown. 

While, on the surplus shown, the earnings of the Missouri 
Pacific have been sufficient comfortably to pay the 5% dividend 
on the stock, this showing has, as has already been explained, been 
reached by means of maintenance charges considerably below other 
prosperous roads in much the same territory. 

Dividend Record. 

In the old days of the Jay Gould management, and in the 
flush years of the eighties, 6% and 7% dividends were paid, these 
declining to 3% in 1891 and totally disappearing through eight 
years up to 1900. The full dividend record has been as follows : 



1880.. 
1881.. 

1882.. 
1883-7 

1888.. 



Per cent. 



U 
6 

7 
5* 



1889-0. 
1891... 
1892-00 
1901... 
1902-6. 



Per cent. 



4 
3 

2* 
5 



The Balance Sheet. 

The balance sheet of the Missouri Pacific Railway at the close 
of the fiscal year of 1906, not including supplies and materials on 
hand, stood as follows : 



MISSOURI PACIFIC 465 

Current assets : 

Cash $4,365,984 

Discount fund on bonds sold 2,559,166 

Sundry accounts 4,191,725 

Due from St. L. I. M. Ry Co 936,300 

Total $12,053,175 

Current liabilities 7,145,918 

Leaving a working balance of $ 4,907,257 

The balance sheet of the St. Louis, Iron Mountain & Southern 
Railway, shown separately, showed as follows : 

Current assets : 

Discount fund on bonds sold $ 3,200,985 

Land grant accounts 5,322,206 

Cash 743,327 

Sundry accounts 406,181 

Total $ 9,672,699 

Current liabilities 2,653,524 

Leaving a working balance of $ 7,019,175 

The amount to the credit of profit and loss, itemized as Net In- 
come, was on the Missouri Pacific Company, $6,455,423, and on 
the St. Louis, Iron Mountain & Southern, $7,788,022, which, with 
a small similar balance for the Central Branch Railway, make up a 
total credit to profit and loss of $14,527,740 for the system. 

Investment Value. 

The securities of the Missouri Pacific have undoubtedly suf- 
fered from the incomplete character of the reports of the road and 
the inability of the public to gain any clear insight into the opera- 
tions of the system. In the report for 1906 a very commendable 
effort was made to meet the present day demands for publicity by 
a full and complete statement of the road's affairs. The full bonded 
indebtedness of the system is shown, the items of securities held is 
illustrated, and the operating expenses given in detail, yet there 
are sundry items, such as the character of the traffic, the average 
freight rate per ton mile, the average number of tons per car, the 
average train load and similar items, which are not given, though 

30 



466 MISSOURI PACIFIC 

some of them may be laboriously computed from the figures pre- 
sented. 

Added to this previous lack of frankness has been the recent 
heavy issue of new securities, which always tends to depress the 
price of a stock, and undoubtedly some of the old-time prejudices 
against Gould securities still survive. 

This prejudice, at least on any of the old-time basis, is cer- 
tainly undeserved. The present Gould policy is one of steady up- 
building and conservative growth. It could have been in large part 
removed by greater frankness towards the public, and the step 
which has been taken in the reports for 1906 has gone far to 
dissipate it. 

On the other hand, it is evident that the Missouri Pacific has 
not been handled with the same energy, nor with such satisfactory 
results, as, for example, a road like the Atchison. It is true that 
the latter is a through road, having its own line to the Pacific, and 
when the Western Pacific division of the Gould system is com- 
pleted a large extension of business may ensue. But the mileage of 
the Gould lines is already one of the most extensive in the Union, 
and with the purchase of the Western Maryland, already covers 
three-quarters of the distance from the Atlantic to the Pacific. 
With such enormous freight gathering facilities it is not entirely 
clear why the Missouri Pacific should not have enjoyed the same 
degree of prosperity as the Atchison, the Union Pacific and similar 
lines. 

It is clear from the preceding analysis that the net capitalization 
of the Missouri Pacific system, even with the addition of new roads, 
is still far below that of most of its competitors, yet on a 5% basis, 
even in the tremendous year of 1906, with solid railway securities 
selling in general on about a 3^ % basis, the stock of the road rose 
above par only for a short period, and in the very moderate decline 
in the spring, declined to $85 per share. In the huge rise of prices 
in 1902 the stock was carried to $125, and even in the prolonged 
slump of 1903-4 it declined only to $85. At the same time the 
stock of the Atchison went as low as $54, and of the Union Pacific 
as low as $65. In 1906 Atchison rose to $110, and the Union Pa- 
cific, though by methods which excited much criticism, was put up 
to $195. At the same time the highest point touched by Missouri 
Pacific was $106, in the great rise of January in the same year. 

The suspicion and distrust inevitably suggested by secrecy have 
no longer a basis, and the Missouri Pacific may now be judged on 
its merits, along with other roads. After meeting unusually heavy 



MISSOURI PACIFIC 467 

maintenance charges, caused in part by floods and washouts, Atchi- 
son was able to show about 9% of surplus on its common stock, 
over and above the preferred dividends for the five years from 
1902. In the same period the Missouri Pacific showed an average 
surplus of 8% on its capital stock ; but had the maintenance charges 
been on the Atchison basis, the earnings per mile, compared, this 
nominal surplus would have been very considerably reduced, prob- 
ably to an average of not more than 5 % . 

In other words, had the Missouri Pacific's maintenance been 
equally as liberal as the Atchison's, earnings compared, the Atchi- 
son could have paid a 6% dividend and shown a rather larger per- 
centage of net surplus after dividends than could the Missouri 
Pacific after paying 4% dividends. In 1906 the net surplus, after 
dividends shown by the Atchison of 5% on both the common and the 
preferred, was equivalent to 6.8% on the common stock, while the 
surplus shown by the Missouri Pacific, after a 5% dividend, was 
equivalent to 3.1% on the common stock; and this surplus would 
have been practically wiped out with maintenance charges on a scale 
similar to the Atchison's. 

The year of 1906 and the immediately preceding years have 
been for the Southwest, years of unexampled prosperity, amounting 
in many sections to a tremendous boom. In times past booms have 
been invariably succeeded by years of depression. Should such a 
depression come, it is evident from the foregoing that where the 
Atchison should be able comfortably to maintain its 5% dividends, 
it is more likely that the dividend of the Missouri Pacific would 
have to be reduced, for the Atchison has a wide margin of heavy 
maintenance charges which could be scaled in case of necessity, 
while the Missouri Pacific has not. 

Over against this is to be set, first, the extension of the Gould 
system westward to the Pacific, and, second, the completion of the 
low grade line from St. Louis to New Orleans, and the very con- 
siderable increase of business which should be derived from these 
two sources. The Missouri Pacific has been upon a 5% basis now 
for five years, and, as a matter of policy as well as of pride, every 
effort should be made to maintain this basis even in less prosperous 
times, and should the new lines produce the business that is ex- 
pected of them, this undoubtedly could be done. In 1906 the system 
carried to the credit of profit and loss, over and above its dividend, 
$2,438,000. Of this, about $600,000 was a distribution of the surplus 
of the Central Branch Lines over and above its net earnings for 
the year, leaving a net surplus over this special dividend of about 



468 MISSOURI PACIFIC 

$1,800,000. The road was in excellent condition as to working 
capital, and its total profit and loss balance was high. 

From all this the investor is likely to conclude that Missouri 
Pacific may be held to a 5% basis unless a prolonged period of 
depression ensues. But he will probably conclude also that the mar- 
gin for this dividend is none too wide, and that it does not present 
the same degree of security as many other 5% stocks. 

For these reasons it seems doubtful, should high rates for 
money such as obtained in 1906 continue, that Missouri Pacific would 
sell very much above par, and on a general slump in the market it 
might sell considerably below. If the stock could sell down to $85 
per share on so slight a general recession as that of 1906, it should 
sell somewhat lower on a more general decline. At $83 per share 
the stock would yield 6%. Purchased at something like these figures 
or better, it would yield a rate of interest commensurate with the 
risk involved, with a large probability that the earnings of the road 
will be maintained or increased from its added sources of business, 
even in less prosperous years. The speculative investor, gambling 
for a rise rather than considering safe investments, will consider 
the fact that Gould securities do not enjoy the same degree of public 
favor as many others ; and likewise that this prejudice against them 
is likely to disappear with the more ready access to the operations of 
the company which is now obtainable. 



MOBILE AND OHIO RAILROAD. 

Though operated separately, nearly all the stock of the Mobile 
& Ohio is owned by the Southern Railway, and it is, to all intents, 
a part of the Southern Railway system. The line extends from 
St. Louis to Mobile, and in 1906 it operated 926 miles. The gross 
earnings for 1906 were $9,445,927, or $10,200 per mile. 

Appropriations for equipment for 1906 were $1,417 per mile 
for way and $1,236 for equipment, a total of $2,653. The propor- 
tion of income expended for maintenance has not varied greatly in a 
number of years. The freight traffic density for 1906 was 1,204,011 
ton miles, and on a line of this character it may be assumed that 
the maintenance has been entirely adequate. 

On the basis of this maintenance, the company showed a total 
net income of $3,204,991, the fixed charges consuming 62% of 
this, leaving an ample margin of safety for the interest on the 
underlying securities. There remained a surplus of $1,209,818, 
equivalent to 20% on the outstanding capital stock of $6,070,600. 
The dividend for the calendar year of 1905 was 6%, and for the 
calendar year of 1906 it was S J / 2 %. It is evident from this that 
the Southern Railway has an equity of some value in the undis- 
tributed surplus. If the surplus shown were evenly divided between 
dividends and improvements, this equity was in the neighborhood of 
$250,000 for the year of 1906. 

As of June 30th, 1906, the Southern Railway owned $5,670,- 
200 of the $6,070,600 stock outstanding, and likewise $8,035,000 of 
the $9,472,000 general mortgage 4% bonds. The purchase of the 
latter securities was made owing to the fact that voting power on 
$4, 984,200 of the stock is exercised by the general mortgage bond 
holders, by virtue of the deposit in trust under the general mortgage 
of the old debentures of 1879. 

In 1906 the Mobile & Ohio owned practically all of the stock 
of the St. Louis & Cairo Railroad, issuing therefor $2,500,000 of 
collateral 4% bonds. The St. Louis & Cairo — 159 miles— is leased 
by the Mobile & Ohio. 

(469) 



NASHVILLE, CHATTANOOGA AND ST. LOUIS 

RAILWAY. 

The Nashville, Chattanooga & St. Louis is a subsidiary of the 
Louisville & Nashville, although separately Operated. Of its $10,- 
000,000 outstanding stock $7,177,600, or 71%, is owned by the 
Louisville & Nashville. In 1906 it operated 1,226 miles, including 
the Paducah & Memphis, leased from the Louisville & Nashville; 
its mileage has changed very little in several years. On earnings of 
$9,071 per mile it is capitalized for a total of $21,222 per mile, not 
capitalizing the $624,862 paid in rentals. 

The fixed charges, including rentals, consumed only 45% of the 
total net income for 1906. For a number of years the maintenance 
charges have been very heavily loaded for improvements and addi- 
tions, the excess maintenance ranging from $700 to $1,000 per 
mile per annum. In 1906 a separate item was made of these im- 
provements, with the result that the surplus earned showed a large 
increase to a total of $2,243,413. Of this amount $1,289,421 was 
turned back into the road for permanent improvements. 

The surplus shown before the deduction noted was equivalent 
to 22% on the capital stock of the road, and this represents some- 
where near the normal, actual, annual earnings. Beginning with 
1904, 4% was paid on the stock, this rate being raised to 5% in 
1905 and 6% in 1907. Earning around 20% per year, and dividing 
this equally between dividends and improvements, the road is per- 
fectly able to pay an annual 10% dividend, so that the Louisville 
& Nashville's equity in the undisturbed earnings was certainly 
equal to 4% on its holdings, or around $300,000 at the inside. 

Belonging to so rich and so well managed a system as that of 
the Louisville & Nashville, and traversing a fine section of the coun- 
try, the stock is probably as solid as any to be found anywhere. It 
may be assumed that with the results beginning to show from the 
heavy sums set aside from earnings for improvements, the dividend 
will be raised to a 7% or 8% basis, if not higher, should there be no 
heavy recession in business. The stock should be well worth that of 
the parent road, or at least from $120 to $150 per share, according 
to prevailing money rates. 

(470) 



NEW YORK CENTRAL AND HUDSON RIVER 

RAILROAD. 

The New York Central & Hudson River Railroad divides with 
the Pennsylvania the distinction of being the most important rail- 
road in the United States, although in point of gross earnings it 
comes after both the Pennsylvania and the Southern Pacific. It is 
the chief property of an interest controlling a larger mileage than 
any other system in this country, or, for that matter, in the world. 
It is the principal railway leading out of New York City, and it 
covers an important line of towns and cities the entire length of its 
route. It has, moreover, the only "water grade" between the sea- 
board, the Great Lakes and Chicago. Nevertheless, its tonnage, 
earnings and profits are considerably below those of its chief rival, 
the Pennsylvania. A comparison of the chief features of the two 
companies will be found under the analysis of the Pennsylvania 
road. 

History. 

The road represents the consolidation in 1869 of the Hudson 
River Railroad and the New York Central. The latter in its turn 
was the union of four small lines, extending from Albany to Buffalo. 
It is of some interest to note that this consolidation at the time 
aroused great opposition ; also that the average time consumed in 
the journey from Albany to Buffalo before the consolidation was 
thirty hours. The fast express trains now cover the entire distance 
from New York to Buffalo in eight hours. 

Since the original consolidation, the Central has also acquired 
the New York & Harlem line, the West Shore, and several sub- 
sidiary roads. It operates the Boston & Albany under lease, and 
owns the larger part of the stocks of the Lake Shore & Michigan 
Southern and the Michigan Central railroads. Through these it 
directly controls a total of over 12,000 miles of operated road. 

Ownership. 

The control of the New York Central was purchased by Com- 
modore Vanderbilt in 1851, and the consolidation with the Hudson 

(471) 



472 NEW YORK CENTRAL & HUDSON RIVER 

River Railroad and other roads was carried out by him. The sys- 
tem has ever since been the proprietary interest of this family. 
Within the last few years the Standard Oil interest has also become 
prominent in the directorate, and its holdings are said to be heavy. 
In 1906 the Vanderbilt interests were represented in the directorate 
by William K. and Frederick W. Vanderbilt, Chauncey M. Depew 
(chairman), William H. Newman( president), H. McK. Twombly, 
Samuel F. Barger and Charles C. Clarke (former first vice-presi- 
dent). The Standard Oil interests were represented directly by 
William Rockefeller and James Stillman (president of the National 
City Bank), the First National Bank, by its president, George F. 
Baker, and by J. Pierpont Morgan, a director. The other directors 
were D. O. Mills (capitalist) and George S. Bowdoin. 

The New York Central is the fourth most widely held railway 
stock of the country ; the number of shareholders reported for 1905 
was 11,782 against about 44,000 fo the Pennsylvania. 

Affiliations. 

It will be observed that no representatives of other lines are 
included in the Central's directorate, with the possible exception of 
Mr. Morgan. The latter is generally regarded as the dominating 
influence in the Erie Railroad, which is the Central's most direct 
competitor. The Central leases or controls airectly, or through 
subsidiary companies, the following lines : 

Boston & Albany, 

Lake Shore & Michigan Southern. 

Michigan Central (and Canada Southern), 

New York, Chicago & St. Louis (Nickel Plate), 

Cleveland, Cincinnati, Chicago & St. Louis (Big Four), 

Peoria & Eastern, 

Pittsburg & Lake Erie, 

Lake Erie & Western, 

Chicago, Indiana & Southern. ' 

Toronto, Hamilton & Buffalo, 

Rutland, 

and a number of smaller lines. 

In addition to these, the New York Central owns through the 
Lake Shore, one-half of a block of $60,000,000 out of a total of 
$140,000,000 of Reading stock, or sufficient to insure a working 
control of the latter. The other half is owned by the Baltimore & 



NEW YORK CENTRAL & HUDSON RIVER 473 

Ohio, and the B. & O. in its turn is controlled by the Pennsylvania 
and Union Pacific. The Reading, again, controls the Central of New 
Jersey. Through the Lake Shore, the New York Central has large 
interests in the Lehigh Valley, and is directly represented in the 
directorate of that road by H. McK. Twombly and George F. Baker. 
Messrs. Baker, Twombly, F. W. Vanderbilt, William Rockefeller 
and James Stillman, all in the New York Central directorate, are 
also members of the Board of Managers of the Delaware & Lacka- 
wanna. Messrs. Twombly, D. O. Mills and George F. Baker are 
included in the Erie directorate. On the board of the Delaware 
& Hudson, and again of the New York, Ontario & Western, is 
Chauncey M. Depew. Messrs. Twombly, Rockefeller and Morgan 
are on the board of the New York, New Haven & Hartford, and the 
New York, Susquehanna & Western is owned by the Erie, so that 
there is no line in New York State, or running out of New York 
City, in which representatives of the New York Central are not 
included. This is part of the "community of interest" idea which 
has so effectively disposed of the disastrous rate wars of former 
days. 

The present active head of the New York Central road is 
William K. Vanderbilt, who succeeded to that position on the death 
of his brother, Cornelius Vanderbilt II. Through him the latter day 
Vanderbilt policy has been rather accentuated, and its extreme con- 
servatism has met with some unfavorable criticism in failing to 
meet the very aggressive tactics of the Cassatt regime in the Penn- 
sylvania Railroad. At the present time, however, the Central is 
carrying out a vast scheme of improvements which will undoubtedly 
maintain for it its traditional position. 

Capitalization. 

The New York Central actually owns only 806 miles of road ; 
it leases 2,620 miles, and the balance of the total of 3,784 miles is 
operated under contract or under trackage rights. In 1906 it paid as 
rentals of leased lines, mainly in the form of interest and dividends 
on guaranteed stocks and bonds, $9,501,170, as against $8,214,519 
interest on its own funded debt. Capitalizing rentals on a 4% 
basis, this yields the sum of $237,529,250 — a figure which is 
probably under the actual market value of the securities of the 
underlying roads. Adding this amount to the nominal capital shown, 
the capitalization of the road January 1st, 1907, stood as follows: 



474 NEW YORK CENTRAL & HUDSON RIVER 

Common stock $178,182,700 

Funded debt 230,564,845 

Total capital $408,747,545 

Rentals, capitalized at 4% 237,529,250 

Approximate gross capitalization . . . $646,276,795 
Securities held 180,129,254 

Approximate net capitalization. .. .$466,147,541 

Approximate net capitalization per mile. $123,188 

Average miles operated 3,784 

Net earnings on net capital 5.8% 

Stock on net capitalization 38% 

Fixed charges on total net income 64% 

Factor of Safety 36% 

Style of Capitalization. 

Nominally, the funded debt of the road is small — excluding the 
collateral bonds issued in exchange for the Lake Shore and the 
Michigan Central stocks, about $120,000,000. If, pursuant to the 
policy of this book, we capitalize rentals paid at the rate of 4%, this 
adds $237,500,000 of liabilities, giving a total of $347,500,000. This 
stands against $178,000,000 of outstanding stock at the close of 1906. 
Securities and advances deducted, the stock therefore represents 38% 
of the estimated net capitalization, as against 50% for the New- 
Haven and 53% for the Pennsylvania. The total net income for 
1906 was $34,843,810; fixed charges, including rentals and taxes, 
$22,267,904. Fixed charges consumed, therefore, 64% of the total 
available income. This is against 38% for the Pennsylvania, 38% 
for the Delaware & Lackawanna, 38% for the Lake Shore, and 56% 
for the New York and New Haven. 

This would mean that the total income of the Central could 
decline approximately 36% before payments of its bonds, leases and 
guarantees became impaired. So, in a broad way, it may be said 
that these securities have a "factor of safety" of at least 36%. This 
compares with a similar estimate of a "factor of safety" on Penn- 
sylvania securities of over 60%, and the same figure for the Lacka- 
wanna and Lake Shore. 

The net earnings for 1906, including $1,308,760 charged to 
earnings for extraordinary improvements, represented 5.8% on the 



NEW YORK CENTRAL & HUDSON RIVER 475 

$466,000,000 here estimated as the approximate net capitalization 
of the road. This percentage compares with a similar estimate of 
8.1% for the Pennsylvania, 8.8% for the New Haven, 137% for 
the Lackawanna, about 10% (estimated) for the Michigan Cen- 
tral and 12.7% for the Lake Shore. It will be seen, therefore, that 
the New York Central is very highly capitalized, in comparison with 
the roads named. The general average for the country is 6%. 

Equities Owned. 

In 1906 the dividends on the Lake Shore were increased to 
12%, and the Michigan Central's to 6%, so that the yield to the 
New York Central represents a handsome surplus over the interest 
paid on the bonds issued for the stock. In 1907 this excess of return 
aggregates $3,700,000. As a matter of fact, the New York Central's 
equity in these roads is considerably greater than this, since the 
operating expenses of these two lines have been systematically sur- 
charged through a series of years, and the dividend returns on 
either of them might be further increased without in any way 
crippling the roads. All told, the New York Central might derive 
a surplus other than income from these sources of $5,000,000 or 
more, or about 3.7% on the outstanding stock as of January, 1907. 

Increase of Capitalization. 

The following shows the increase of nominal capital and earn- 
ings from 1900 to the close of 1906 : 



Year 


Common 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1900 

1906 


$115,000,000 
178,182,700 


$185,751,021 
230,564,845 


$300,751,021 
408,746,545 


$54,562,952 
92,089,768 



Increase over six and a half years: Nominal capital, 36%; gross earnings, 

70%. 

In other words, the earnings increased twice as fast as did the 
capital employed. Yet this increase was not used to swell dividends, 
but put back into the road in heavier maintenance and improve- 
ments. 

Character of Traffic. 

The Central's reports show that the character of its traffic is well 
distributed, so that it is not vitally affected by depression in any 
especial industry. Its passenger traffic is heavy and yields 30% of 
the gross income. In its freight traffic the largest single item is coal 



476 NEW YORK CENTRAL & HUDSON RIVER 



and coke (37%) ; farm products comprise 20%; manufactures and 
other tonnage the balance. 

Stability of Earnings. 

Since 1896 the Central's mileage has increased nearly 1,400 
miles, or 58%, while gross earnings have more than doubled. The 
earnings have shown great stability, increasing very steadily, as the 
following table reveals : 



Year 


Average 
Miles Operated 


Gross Earnings 


Earnings 
per Mile 


1896-7 


2,395 

2,395 

2,395 

2,817 

3,223 

3,320 

3,424, 

3,490 

3,774 

3,784 


$43,614,405 
45,774,240 
46,184,657 
54,562,951 
66,333,111 
70,903,868 
70,605,778 
77,682,221 
86,095,602 
92,089,768 


$18,210 


1897-8 


19,112 


1898-9 


19,285 


1899-0 


19,369 


1900-1 


20,581 


1901-2 


21,356 


1902-3 


20,626 


1903-4 


22,258 


1905 

1906 


22,547 
24,336 







Traffic Density and Maintenance. 

Since 1900 traffic density and maintenance charges have com- 
pared as follows : 





Freight Traffic 


Maintenance per Mile 




Year 


Density (Ton miles 




Total 








per mile of road) 


Way 


Equipment 




1900-1 


2,049,919 


$2,426 


$2,430 


$4,856 


1900-2 


1,929,995 


2,590 


2,792 


5,382 


1900-3 


2,152,138 


3,059 


3,180 


6,239 


1900-4 


1,988,206 


2,891 


3,255 


6,146 


1905 


2,231,435 


2,648 


3,508 


6,156 


1906 


2,226,046 


2,832 


3,850 


6,682 


Average. . 


2,096,289 


$2,741 


$3,169 


$5,910 



Miles of extra main track, 2,037. 



Penn 

Erie 

Lackawanna 
Leh. Val. . . . 



4,130,690 
2,434,819 
3,079,629 
2,771,846 




5,232 
3,216 
3,579 
3,429 



8,984 
5,077 
8,333 
6,017 



On an increase in traffic of about 10% in six and a half years, 
maintenance increased 38%. But even this liberal maintenance does 
not adequately represent the solid policy of the road. Systematically 
through a series of years, considerable sums have annually been 
set aside from surplus earnings for special improvements, new 
equipment, etc., as follows : 



NEW YORK CENTRAL & HUDSON RIVER 477 

1899-0 $ 2,000,000 

1900-1 1,500,000 

1901-2 1,750,000 

1902-3 1,750,000 

1903-4 2,207,000 

1905 3,032,000 

1906 4,108,260 



Total $16,347,260 

This on 3,700 miles or more, average length of road, does not 
compare with the $22,456,624 set aside by the Lackawanna on less 
than 800 miles in six years, nor with the $63,652,929 devoted to the 
same purpose by the Pennsylvania since 1900. 

Surplus Earnings. 

It is evident enough from the following table that surplus has 
been pretty carefully adjusted to meet dividend requirements, the 
balance, as the preceding figures show, having gone back into im- 
provement of the road. In the amounts shown below is included, 
however, sums charged to operating expenses for "extraordinary 
expenditures," and is the surplus shown before deducting the items 
given in the table preceding: 



Year 


Surplus 


Per cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Average 
Price 


1900-1 


$7,742,183 

8,016,718 

8,724,304 

9,107,757 

10,258,569 

12,275,906 


6.7 
6.7 
6.5 

6.8 
7.7 
8. 


5 
5 
5 
5 
5 
51 


141 


1901-2 


160 


1902-3 


159 


1904 


129 


1905 


154 


1906 


139 






Average 




7.06 


5% 


147 







Dividend Record. 

The financial history of the Central is reflected in its dividend 
record, and that record is an enviable one. In the 36 years of its 
existence as a consolidated road (and for many years previously as 
separate lines) it has never defaulted a bond, and it has never 
passed a year without a dividend. This period covers two of the 
severest depressions that the United States has known, viz., 1873-7, 
and 1893-97 — evidence that railroads in no wise differ from any 
other business, and that careful and intelligent management meets 



478 NEW YORK CENTRAL & HUDSON RIVER 

with the same reward here as elsewhere. The following is the full 
record of the consolidated road : 

Year. Dividends Paid. 

% 
1869-84 8 

1885 zy 2 

1886-89 4 

1890-91 Ay 2 

1892 sy 4 

1893-94 5 

1895 AV A 

1896-99 4 

1900-05 5 

1906 5K 

In December, 1906, the stock was put on a 6% basis. 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet showed : 

Current assets $37,765,111 

Current liabilities 18,894,077 

Leaving a working balance of $18,871,034 

Asset items in suspense exceeded liabilities to lessor companies 
by about $1,400,000. 

The amount of cash on hand was $6,993,638 and the balance to 
credit of profit and loss, $14,631,553. 

Investment Value. 

In 1900 the New York Central was restored to a 5% dividend 
basis after an interval of six years. It so remained until late in 1906, 
when, following the Union Pacific, the Pennsylvania and other lines, 
the dividend was increased to 6%. At the same time the dividends 
on the Lake Shore were increased from 8% to 12%, and on the 
Michigan Central from 4% to 6%. Both of these latter increases 
were amply justified and resulted in an addition of $754,820 in the 
other income of the New York Central for 1906. For the full year 
the increase would have been equal to about $2,150,000, or equiva- 
lent to considerably more than 1% on the entire amount of New 
York Central stock outstanding at the close of 1906. In other 
words, the Central simply drew from its equities in the earnings of 
these two subsidiary roads sufficient to increase its dividend by 1%. 



NEW YORK CENTRAL & HUDSON RIVER 479 

Previous to this the income derived from the Central's ownership of 
these two roads was but little more than sufficient to pay the in- 
terest on the bonds issued in purchase of the two roads. 

Compared with the Pennsylvania, however, it will be seen that 
the surplus remaining after dividend payments on the Central has 
generally been small, and the part of the surplus devoted to improve- 
ments nothing like the Pennsylvania's tradition of a dollar-for- 
dividends, a dollar-for-improvements. A careful examination of the 
reports indicates that the maintenance standard of the Pennsylvania 
is, if anything, higher than that of the New York Central. For 
example, in repairs of its locomotives in 1906 the Pennsylvania 
spenl 9.4 cents per engine per mile, as against 9 cents on the Cen- 
tral, while the Pennsylvania spent in repairs apparently about 1.07 
cents per freight car mile, as against about .70 cents on the Central. 
The higher earnings shown by the Pennsylvania, therefore, are not 
merely a matter of bookkeeping. 

By comparison of the Central's range of price with that of 
its chief competitor, it will be seen that on a 5% basis it has sold 
in general at about the same level and in 1906 rather higher than 
the Pennsylvania on a basis of 6%. The reason for this is not very 
clear. The New York Central has very large equities in its sub- 
sidiary lines, but so has the Pennsylvania. It can be shown that the 
Lake Shore in 1906 earned around 23% ; but the Pennsylvania Com- 
pany (operating the lines West) earned nearly 15%, and while the 
Lake Shore was put upon a 12% basis in order to provide for the 
Central's increased dividend, the Pennsylvania Company's dividend 
was raised only from 5% to 6%. The Pennsylvania's undistributed 
equities of 1907 should exceed those of the New York Central. 

On as solid a basis of maintenance charges, the Pennsylvania 
showed about 50% higher surplus for its stock than the New York 
Central, and its dividend rate was 16% higher. It is true that the 
New York Central's earnings rest upon a broader and perhaps 
firmer basis ; one-half of the Pennsylvania's enormous tonnage is 
coal and coke. This probably gives a larger sense of security to New 
York Central stock in the face of the fact that its showing of earn- 
ings is generally smaller. Then, too, there is undoubtedly a little 
sentiment ; rich men like to hold New York Central stock ; and they 
and others are apparently willing to average about 20% less from 
their holdings than if they were in Pennsylvania or in many other 
standard roads. 

In June of 1907, six months after the dividend was raised to 
f o, New York Central sold at $108^ per share, the lowest since 



480 NEW YORK CENTRAL & HUDSON RIVER 

1898. In November of 1901, on a 5% basis, it sold at $174 per 
share. The high point of 1902 was $168, the low of 1903, $112, and 
the high of 1906, $167. These are wide fluctuations in a stock of 
the Central's character, and presented large opportunities for profit 
to the investor who bought it at the low levels and sold it at the high. 

The low price of 1907 was especially occasioned by a bad show- 
ing for the spring quarter, and by the difficulty which the Central, 
like other roads, found in raising new capital to carry on its im- 
provements. Unless unfavorable conditions should continue, it is 
not improbable that, roughly speaking, these prices, $108-$174, might 
represent somewhere near the outside limits of fluctuation for 
several years to come. It is hardly likely that the marked increase 
in the earning power of invested capital will continue at the same 
rapid rate as it has in the past five years. The chances are rather 
that it will tend to decline somewhat. Only a change of manage- 
ment, therefore, would be likely to put the stock at a higher figure 
than those already noted. 

Undoubtedly control of the Central would readily sell at a high 
figure. But the ownership of the road has not changed in more 
than half a century, and there seems little likelihood of a change in 
either management or policy now. 



NEW YORK, CHICAGO AND ST. LOUIS RAIL- 
ROAD COMPANY. 

The "Nickel Plate," as it is familiarly known, was one of those 
mushroom lines, built to all intents for speculative purposes, like 
the West Shore, in the early eighties. The main object of the con- 
struction of the road apparently was simpfly to "hold up" the Van- 
derbilts. Whether or no the object was successful, it is certain 
at least that the Nickel Plate, like the West Shore, came under 
Vanderbilt ownership, and so remained. 

The road was opened for operation in 1882. Fierce rate wars 
resulted in the bankruptcy of the road in 1886, and likewise in the 
cutting down of the Lake Shore's dividend of 8% in 1883 to noth- 
ing in 1885-6. The Nickel Plate was foreclosed in 1887, and the 
New York, Chicago & St. Louis Railroad succeeded the old com- 
pany. 

The road operates 523 miles from Buffalo to Chicago, abso- 
lutely paralleling the Lake Shore. It is, however, merely a single 
track line, and no attempt has been made to bring it up to the 
Lake Shore standard. 

The Lake Shore Railroad holds $6,240,000 of the common, 
$2,503,000 of the first preferred, and $6,275,000 of the second pre- 
ferred ; that is to say, working control of the road. The directorate 
of 1906 included nine New York Central-Lake Shore directors, to- 
gether with William H. CannifT, president of the road; John S. 
Kennedy, Ralph W. Hickox and W. Emlen Roosevelt. The Nickel 
Plate has no ownership in other stocks, and is simply a subsidiary 
line of the Lake Shore. The road, however, is operated independ- 
ently. 

Capitalization. 

The Nickel Plate has practically no leased lines (9 miles), and 
its nominal capitalization is therefore its actual capitalization. This, 
on January 1st, 1907, was as follows : 

Common stock ' $14,000,000 

First preferred stock 5,000,000 

31 (481) _ ] 



482 NfiW YORK, CHICAGO & ST. LOUIS 

Second preferred stock 11,000,000 

Total $30,000,000 

Bonds outstanding 19,397,000 

Nominal capital $49,397,000 

Approximate capitalization per mile $94,449 

Miles operated 523 

Net earnings on total capitalization. ...... 6.0% 

Stock on net capitalization 60% 

Fixed charges on total net income 41 % 

Factor of Safety 59% 

Included under fixed charges was $140,053, paid as principal on 
car trusts. 

The capitalization per mile, $94,449, is for a single track line, 
as compared with $78,987 per mile for the four-tracked Lake 
Shore. The Lake Shore is one of the best equipped and finest built 
railroads in the United States. It is easy to see, therefore, that the 
Nickel Plate is under the handicap of a highly inflated capitalization. 
It is not probable that the road ever cost, in the level country 
through which it runs, more than one-third of its capitalization. 

Yet even with all this "water," the road's earnings are not as 
low as might be expected. In 1906 net earnings showed 6.0% on the 
capitalization, as against 5.8% on the New York Central and about 
13% for the Lake Shore. 

The capitalization is distributed in such a way as to forestall 
a second visit of the sheriff, the stock representing 60% of the total 
capitalization. Fixed charges consumed only 41% of the total net 
income, leaving a factor of safety for the interest on the securities 
of nearly 60%. 

Increase of Capitalization. 

Neither the stock nor the bonded indebtedness of the road has 
been materially changed since its reorganization up to the close of 
1906. Probably in this regard the Nickel Plate is unique, for cer- 
tainly there are few roads in the country which have remained for 
twenty years at the same level of capitalization. The road, how- 
ever, has been prosperous latterly, and in 1906 $10,000,000 4% 
debentures were authorized, but not issued. The money so derived 



NEW YORK, CHICAGO & ST. LOUIS 



483 



was to be used to purchase 4,000 new cars, and this would enable 
the company to save considerable sums per annum for hire of equip- 
ment. There was a per diem mileage balance in the cost of transpor- 
tation for 1906 of $304,711, a considerable sum for a road doing such 
a volume of business. It was equivalent to the hire of 2,800 cars 
through the year. 

Character of Traffic. 

The Nickel Plate does a very large business and is dependent 
upon no single interest for its prosperity. The largest single item 
in its tonnage was coal and coke. Even this amounted to less than 
15%. Passenger earnings were comparatively very small, repre- 
senting only 15% of the gross earnings. The Nickel Plate is prac- 
tically a freight road with a very solid character of traffic. 

Stability of Earnings. 

With no increase in capital or mileage, the gross earnings of 
ten years have risen from five and a half million dollars in 1896 to 
nearly ten million dollars in 1905, increasing very evenly, as the fol- 
lowing shows: 



Year 



1896. 
1897. 
1898. 
1899. 
1900. 
1901. 
1902. 
1903. 
1904. 
1905. 
1906. 



Miles Operated 


Gross Earnings 


Per Mile 


523 


$5,587,766 


$10,693 


523 


5,815,217 


11,129 


523 


6,391,421 


12,220 


523 


6,919,985 


13,230 


523 


7,023,358 


13,428 


523 


7,485,484 


14,312 


523 


7,138,899 


13,649 


523 


8,448,320 


16,153 


523 


8,645,374 


16,528 


523 


9,108,730 


17,416 


523 


9,902,208 


18,933 


Maintena 


ince. 





Previous to 1905, considerable sums for improvements had 
been charged to operating expenses. In 1905 these amounts for 
improvements were separately itemized, but they have been included 
in the figures for 1905 and 1906 in order to keep the comparisons for 
the seven years on the same basis. Under this arrangement the items 
appear as follows : 



484 



NEW YORK, CHICAGO & ST. LOUIS 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900 


2,313,905 
2,561,082 
2,331,885 
2,504,699 
2,682,149 
2,774,606 
3,030,991 


$1,656 
1,716 
1,939 
2,197 
2,319 
2,429 
2,838 


$1,255 
1,718 
1,560 
2,296 
2,519 
2,459 
2,617 


$2,911 


1901 


3,434 


1902 


3,499 


1903 

1904 

1905 

1906 


4,493 

4,828 
4,889 
5,455 


Average. . . . 


2,599,902 


$2,156 


$2,059 


$4,215 


Lake Shore . . . 
Panhandle. . . . 
Wabash 


3,102,376 

2,193,454 

880,032 


4,308 
2,567 
1,332 


4,093 
3,680 
1,370 


8,401 
6,247 
2,702 



It will be seen from the above that the traffic density of the 
road is high — almost equalling that of the Lake Shore and very 
considerably exceeding that of the New York Central or the 
Michigan Central. As it is, however, very largely a freight road, 
i.t has not required the same standard of maintenance as the Lake 
Shore. Charges have carried considerable sums devoted to im- 
provements, which including $250,000 set aside from surplus in 1905, 
and $350,000 so devoted in 1906, have been as follows : 

1901 $756,000 

1902 585,000 

1903 645,572 

1904 674,467 

1905 787,340 

1906 982,889 



Surplus Earnings. 

Both the nominal surplus and the actual surplus derived from 
adding to the former the amounts shown above as devoted to im- 
provements, in pursuance to the policy of this book, are below : 

Surplus Shown. Actual Surplus. 

1901 $ 618,931 $1,374,391 

1902 597,122 1,182,122 

1903 604,248 1,249,820 

1904 618,916 1,293,382 

1905 870,362 1,407,702 

1906 1,115,702 1,748,691 

As already noted, about $140,000 per year has been paid from 



NEW YORK, CHICAGO & ST. LOUIS 485 

earnings as principal on the car trust, and included as part of the 
fixed charges. If this amount were added to the surplus of 1906, the 
total would have been $1,888,691. This would have been sufficient 
to have paid the full 5% on both the first and second preferred and 
show 7.7% on the common stock. 

Dividend Record. 

Two per cent, on the first preferred was paid in 1897, none in 
1898, and since that time 5% regularly. 

Two per cent, also on the second preferred in 1900 and 3% 
subsequently up to 1906. In the latter year the stock was put on a 
4% basis. Nothing has ever been paid on the common. 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet showed : 

Current assets $3,008,073 

Current liabilities 2,443,792 

Leaving a working balance of $ 564,281 

There were, however, items in suspense to the amount of $670,- 
925, or sufficient to wipe out the balance of working capital. The 
item of cash amounted to $1,125,946, and the balance to credit of 
profit and loss to $511,625. 

The company was obviously in need of working capital. 

Investment Value. 

The steady improvement in the affairs of the Nickel Plate is 
shown in the increase in gross earnings, with very slight increase of 
capital, of from $5,800,000 in 1897 to $9,900,000 in 1906, and an 
increase in net earnings of from $994,000 in 1897 to $2,300,000 in 
1906. Excluding the amounts charged to operating expenses for 
new construction and new equipment, the actual net earnings of 
1906 were nearly $3,000,000. If the figure of $1,888,000 be taken 
as the true surplus for the year and the half of this had been devoted 
to improvements, there would have been left $944,000, or sufficient 
to pay the full 5% on both classes of preferred stock and 1% on 
the common. 

The preferred stocks are entitled to 5% non-cumulative divi- 
dends, and after 5% has been paid on the common all classes of stock 
share alike. As the first preferred has been on a 5% basis since 1899, 



486 NEW YORK, CHICAGO & ST. LOUIS 

and as the fixed charges in 1906 consumed only about 40% of the 
actual total net income, it may be taken as a solid dividend stock. 
It sold as high as $124 per share in 1902, declining to par in 1903, 
rising again to $121 in 1906. 

The second preferred on a 3% basis sold as high as $102 in 
1906, the highest quotation ever reached. On a 4% basis it sold as 
low as $80 per share in 1907. This was the lowest quotation also 
for 1906. Save for the scarcity of money and the improvement 
requirements of the road, there was no reason why the full 5% 
should not have been paid on the second preferred in 1906. It was 
amply earned on the most conservative calculation. 

Although on the surplus, as estimated above, 7.7% was ap- 
parently earned on the common stock in 1906, yet on a dollar-for- 
dividend and a dollar-for-improvement policy all of this amount 
would practically have been wiped out. Under the conservative 
policy of the road, therefore, it is improbable that dividends on this 
stock will be paid for some years to come. It sold as high as $57 
per share in 1902, declining to $25 per share in 1904, rising to %76 
in 1905 and declining as low as $35 per share in March of 1907. It 
will be seen that the fluctuations were wide and offered very con- 
siderable opportunities for profit. Purchased at somewhere around 
the quotations of 1904 and 1907 and put by, the stock would un- 
doubtedly show a handsome increment to the investor who was 
willing to wait. 

The company's earnings are amply sufficient to meet the interest 
requirements on the $10,000,000 new capital provided, and this new 
capital should have an immediate effect upon the earnings of the 
road, if for no other reason than that the company for several years 
has been paying out as much in hire of new equipment as the 
interest charges would have amounted to. With these prospects the 
stock should show a steady enhancement in value. 



NEW YORK, NEW HAVEN AND HARTFORD 

RAILROAD. 

The "New Haven," as it is familiarly known, had already become 
through a series of consolidations of minor roads, by far the most 
important rail system in New England, when, in 1907, it practically 
absorbed the Boston and Maine system, and through the latter, the 
Maine Central as well, thus gaining very near to a monopoly of 
New England transportation. Even before this merger, it directly 
operated, within a very circumscribed territory, over two thousand 
miles of track, with 921 miles of extra main track. It controls the 
larger part of the shipping trade along the shores of the territory 
through which it runs, practically eliminating serious competition 
in this direction, and in 1906 it owned about 75% of the street rail- 
ways of Connecticut, and in addition it controlled by ownership of a 
clear majority of the stock, the New York, Ontario & Western, with 
546 operated miles, and over $7,000,000 per annum of gross earn- 
ings. 

Always a large dividend earner, the road under the present 
regime has made noteworthy strides, and the year of 1906 was a 
banner year in its history. Partly through the unusual increase of 
earnings, partly through large savings in the cost of transporta- 
tion, and partly through changes of bookkeeping methods, the sur- 
plus shown in 1906 was half again as large as the average for the 
five previous years. Even this large surplus shown did not represent 
the true earnings of the road, some considerable equities having been 
concealed in the subsidiary companies. 

The road is one of the most independent in the United States, 
but it is understood that with the completion of the Pennsylvania 
improvements across Manhattan and to Long Island, a working 
alliance will be concluded between the two lines, with a connecting 
link, so that trains may be run on an all-rail line from Boston to the 
farthest limits of the Pennsylvania system, as is now achieved 
through ferriage across from Mott Haven. 

The New Haven is also noteworthy as being one of the first 
of the larger roads of the country to introduce electric traction on 

(487)} 



488 NEW YORK, NEW HAVEN & HARTFORD 

its subsidiary lines, and this form of power is gradually being 
applied to the main system. 

History. 

The New Haven represents the consolidation in 1872 of the 
New York & New Haven, and the Hartford & New Haven lines. 
The policy of absorption and consolidation, through purchase or 
lease of minor roads has been followed steadily, the principal items 
being the lease of the Housatonic in 1892, of the Old Colony Rail- 
road in 1893, and of the New England Railroad in 1898. The 
New Haven Steamship Company was acquired in 1900, and the Old 
Colony, the Providence, Stonington and other lines by lease, these 
various lines being consolidated into the New England Navigation 
Company, with gross earnings in 1906 of $4,917,194, and a capital 
stock of $10,000,000, the whole of which is owned by the New 
Haven road. 

With the development of the New England trolley system, the 
New Haven gradually took over a large number of the lines within 
its territory, these being merged into the Consolidated Railway Com- 
pany with a capital of $10,000,000, likewise all owned by the com- 
pany ; this organization having a gross income in 1906 of $5,409,438. 

In 1904 controlling interests in the Central New England Rail- 
road and the Newburg, Dutchess & Connecticut were purchased, and 
in the same year $29,160,000 par value of the common and $2,200 of 
the preferred, a majority of both classes, of the stock of the New 
York, Ontario & Western were acquired, the net cost being $13,- 
108,398. 

The Central of New England owns the Poughkeepsie bridge 
and a small line beyond, giving a direct connection with the Ontario 
road. Through this purchase the New Haven distributes coal from 
the Scranton and Wilkesbarre region to New England, directly over 
its own lines. 

In 1906, owing to opposition in Massachusetts to the New 
Haven's ownership of street railways in that State, the larger part 
of the New Haven's interest in Massachusetts trolley lines was dis- 
posed of to a voluntary association known as the New England 
Investment and Security Company. 

No single interest dominates the New Haven, its stock being 
very widely held by small shareholders in New England. In 1905 
the road reported 10,842 shareholders. For some years interests 
identified with the New York Central have been prominent in the 
directorate, Vanderbilt interests being directly represented by H. 
McK. Twombly, Morgan interests by Mr. Morgan himself, the New 



NEW YORK, NEW HAVEN & HARTFORD 489 

Haven being one of the few large roads outside of the New York 
Central, in which Mr. Morgan is actively a director ; and the Stand- 
ard Oil interests by William Rockefeller. At the beginning of 1905 
President Cassatt of the Pennsylvania was elected a director, and 
since that time the alliance of the New Haven with the Pennsylvania 
has steadily increased in scope. The other directors in 1906 included 
Charles S. Mellen, president ; Charles F. Brooker, vice-president of 
the board; George MacCulloch Miller, George J. Brush and James 
S. Hemingway of New Haven ; Charles F. Choate and Nathaniel 
Thayer of Boston ; I. de Ver Warner of Bridgeport ; Frank W. 
Cheney of South Manchester, Conn. ; Edwin Milner of Moosup, 
Conn. ; William Skinner of Holyoke, Mass. ; D. Newton Barney of 
Farmington, Conn. ; Robert W. Taft, Providence ; John H. Whitte- 
more of Naugatuck, Conn., and James S. Elton of Waterbury, Conn. 
In consequence of the Boston & Maine merger, in June, 1907, 
Hon. Richard Olney of Boston, Chas. M. Pratt and Lewis Cass 
Ledyard of New York, directors in the B. & M., were added to the 
New Haven directorate ; and also Henry K. McHarg of Stamford, 
Frederick F. Brewster and A. Heaton Robertson of New Haven. 
This added two more representatives of Standard Oil interests, 
Messrs. Pratt and Brewster, to the board. 

Capitalization. 

Owing to the numerous consolidations and mergers the capital- 
ization of the New Haven is a rather complicated affair, involving 
numerous leases, guarantees and the like. The statement of 1906 
showed a funded debt including the debentures and debts of the 
merged roads and bonded debt of constituent companies of $112,- 
543,725. In addition to this there were obligations to the owners 
of leased roads of $6,127,882, and bonds of leased roads not con- 
trolled by the New Haven, interest on which is paid or guaranteed 
by the New Haven, to the amount of $20,805,000. 

These items brought the funded debt of the system up to $139,- 
476,607. The statement also includes the outstanding capital stocks 
of operated companies, controlled by stock ownership to the amount 
of $1,167,119. This latter item, with the total of funded debt given 
above, and the capital stock of the New Haven given below, brought 
the capitalization of the road up to $224,000,826. 

But the New Haven paid as rentals on its leased lines in 1906 
$3,935,593, a larger sum than the interest on its bonded debt. A 
part of the rentals paid is in the form of interest on the debt of 



490 NEW YORK, NEW HAVEN & HARTFORD 

leased lines already included in the above estimate of gross capitali- 
zation. From the statement given in the report, it is impossible 
to segregate these items. In the make-up of the table of capitaliza- 
tion given below, $836,577 rentals paid on the New England Rail- 
road and $848,570 interest paid as part rentals have been deducted 
from the rentals paid, and the balance, $2,240,443, capitalized at 4%, 
pursuant to the plan of this book. As there is possibly here some 
duplication, this may introduce some error into the estimate, but it is 
not large, and it is to be recalled that the estimates of capitalization 
are simply approximations in any event. The table for June 30th, 
1906, would then stand : 

Common stock $ 83,357,100 

Stocks of operated companies 1,167,119 

Funded debt, debentures 70,315,725 

Bonds 20,043,000 

Bonds of constituents companies. . . 22,185,000 
Eeased road obligations 6,127,882 

Total capital $ 203,195,826 

Other debt (interest as part rental) 20,805,000 

Rentals capital at 4% 56,011,075 

Approximate gross capitalization $ 280,011,901 

Securities held 66,097,540 

Approximate net capital $213,914,361 

Approximate net capital, per mile $103,741 

Average miles operated 2,062 

Net earnings on net capital 8.2% 

Stock on net capitalization 40% 

Fixed charges on total net income 48% 

Factor of Safety 52% 

In 1907, the absorption of the Consolidated Railway and the 
New England Navigation Company, added $30,000,000 of new 
stock, and this, with other issues during the year brought up the 
total amount of stock to $121,878,100. A considerable part of the 
new stock created was exchanged for stock of the Boston & Maine. 
The $66,000,000 of securities held, shown in the above table, 
directly yielded, in 1906, to the New Haven, only $1,883,568, or a 
little less than 3%. There were, however, undistributed equities in 
several companies, which would very considerably swell this income, 



NEW YORK, NEW HAVEN & HARTFORD 491 

so that the book valuation of $66,000,000 is probably in no wise 
excessive. 

On this basis it will be seen that the approximate net capitaliza- 
tion of the New Haven amounts to about $100,000 per mile, as 
against a similar estimate of $77,660 for the Boston & Maine, $123,- 
188 per mile for the New York Central, and $132,800 for the New 
Haven's subsidiary line, the New York, Ontario & Western. The 
New York & Ontario's gross earnings amount to $13,000 per mile; 
the New York Central's to $24,000 per mile, and the New Haven's 
to $25,700 per mile. It will be seen, therefore, that on the basis of 
its earnings, the capitalization of the New Haven is comparatively 
low. 

This fact is further attested by the percentage which the net 
earnings bear to the net capitalization. In 1906 the net earnings 
amounted to 8.2% on this estimate of net capitalization, as against 
5.8% for the New York Central, 3% for the New York & Ontario, 
5.6% for the Boston & Maine, and 8% for the Pennsylvania. 

It will be seen that the stock of the road represents 40% of its 
estimated net capitalization, while fixed charges in 1906 consumed 
only 48% of the total net income, leaving a factor of safety on the 
underlying securities and guarantees of the road of 52%. The 
factor of safety on the underlying securities of the New York Cen- 
tral is only 36%, and on the Boston & Maine it is only 22%. It 
will be seen, therefore, that the New Haven securities belong in the 
Pennsylvania class ; that is to say, the available net income could 
decline one-half before the interest or guarantee would become 
impaired. 

Equities Owned. 

The most important single item in the list of securities owned 
was the controlling interest in the New York, Ontario & Western. 
This is carried on the books at $13,108,397, the net cost of the stock 
to the company. In 1906 the Ontario was paying a 2% dividend, 
which on the cost of the stock to the New Haven, yielded the road 
above 4.4% on its investment. There was no undistributed equity 
in the Ontario's earnings for the year, but with its new connections 
with the New Haven, giving the road a direct outlet into New 
England, and with the New Haven management, the earnings of the 
road should steadily increase, so that this should become an asset 
of steadily enhancing value. 

The New Haven owned the entire capital stock, $10,000,000, of 
the Consolidated Railroad Company, operating its trolleys, and on 



492 NEW YORK, NEW HAVEN & HARTFORD 

this received a 4% dividend in 1906, and in addition to the above 
there was an undistributed surplus of $120,000. 

Similarly the New Haven received 4% on the $10,000,000 stock 
of the New England Navigation Company, and in 1906, after all 
payments and the writing off of $393,445 for depreciation of steam- 
ers and investments, there still remained an undistributed surplus 
of $163,000. This stock was carried on the books of the company at 
a valuation of $5,948,469. 

In the spring of 1907, the Navigation Co. and the Consolidated 
were merged, on a basis of $20,000,000 for the Navigation Co., $10,- 
000,000 for the Consolidated; and the new company was in turn 
absorbed by the New Haven, exchanging share for share, thus add- 
ing $30,000,000 of New Haven stock. 

The New Haven owns a controlling interest in the Central New 
England Railroad, and in addition to this, $5,904,000, out of a 
total of $7,250,000 of its income bonds, the whole being carried at 
a valuation of $5,440,791 ; on this no interest was paid in 1906. 
The statement shows that operating expenses on the Central of 
New England in 1906 amounted to 90%, this high figure being due 
to the rebuilding and strengthening of the Poughkeepsie bridge. 
Had the road been operated on a 70% basis, this would have yielded 
a surplus of upwards of $330,000 instead of the $7,522 shown, from 
which, if this amount had been used in the interest payments on the 
income bonds, the New Haven would have derived about $250,000 
for the year. 

These are the New Haven's principal equities. 

Included in the $66,000,000 of securities owned were "market- 
able stocks and bonds," to the value of $15,994,585, of which the 
debentures of the Consolidated Railway Company made up the 
larger part, and real estate in Boston, held for sale at $5,210,000. 

Increase of Capitalization. 

If the nominal capital and gross earnings of the New Haven 
for a series of six years be compared, the result would stand as 
follows : 



Year 


Common 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900 

1906 


$54,685,400 
83,357,100 


$27,461,825 
70,315,725 


$82,147,225 
153,672,825 


$40,352,151 
52,984,322 







Increase over six years: Total capital, 87%; gross earnings, 31%. 



NEW YORK, NEW HAVEN & HARTFORD 493 

This comparison shows a very heavy increase in the capitaliza- 
tion with comparatively small increase in the gross earnings, and 
only $36,000,000 of the increase was represented by the purchase of 
new securities. The showing, however, is totally misleading, owing 
to the fact that the New Haven was paying a larger sum in rentals 
in 1900 than in 1906, and that in both these cases the capitalization 
of rented lines exceeded the funded debt of the company. Capitaliz- 
ing the rentals of 1900 on a 4% basis, the gross capitalization of the 
New Haven in that year was in the neighborhood of $194,000,000, 
and deducting $30,000,000 of securities owned, the net capitalization 
was around $164,000,000. 

When this figure is compared with the estimated figure of 1906, 
amounting to $213,000,000, it will be seen that the actual increase 
in the net capitalization, in these six years, has amounted to only 
about 23%. It is this percentage of increase which should rightly 
be compared with the 31% of gross earnings of the New Haven 
proper. 

The New Haven's recent issues have covered a wide variety 
of improvements ; part has been consumed in the street railway 
system, the apparent aim of the company being to build up a system 
which shall practically duplicate its steam roads. A six-track road 
is being constructed from New Rochelle to Mott Haven, designed to 
connect by way of a bridg'e by way of Randall's Island and Ward's 
Island, with the Pennsylvania in Long Island City. The company is 
complying with the legislative enactment requiring the substitution 
of electric traction or some other form of power through the Grand 
Central tunnel and approaches, and the line from Woodlawn to 
Stamford is to be run by electric power ; and a double track short 
line has been authorized to Danbury, Conn., which will greatly 
improve the service on the Housatonic Division. 

Character of Traffic. 

The most noteworthy fact about the New Haven is that its 
passenger earnings nearly equal its freight earnings. While the 
freight earnings since 1900 have risen only from $19,450,000 to 
$27,247,000, passenger earnings have risen from $16,750,000 in 
1900 to $25,250,000 in 1906. 

Passenger earnings on the New Haven represent about 48% 
of the gross earnings, while on the New York Central they repre- 
sent only about 30%, and on the Pensylvania only 20%. 

The average freight rate received by the New Haven amounted 



494 NEW YORK, NEW HAVEN & HARTFORD 

in 1906 to 1.40 cents per ton per mile, as against 1.16 cents for the 
Boston & Maine, .90c. for the Boston & Albany, .64c. on the New 
York Central, and .64c. on the Pennsylvania. 

With such freight rates as these, it is scarcely a wonder that 
the New Haven is able to pay an 8% dividend and practically earns 
about 14% on its capital stock. The freight density of the road 
is low, much less than half that of the New York Central in 1906, 
and scarcely more than a fifth that of the Pennsylvania. The com- 
pany does not itemize its freight traffic, but it is undoubtedly made 
up largely of miscellaneous articles, the cost of handling of which is 
high, but on which it receives a liberal rate. 



Stability of Earnings. 

The consolidations of the New Haven had largely been carried 
out by the beginning of the fiscal year of 1898-99, so that since this 
time the mileage of the system has remained practically unchanged. 
Within this period it will be seen that -the gross earnings have in- 
creased from $37,000,000 to nearly $53,000,000 in eight years. In 
the same time the earnings per mile have risen from $18,235 to 
$25,695. 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


1,404 
1,464 
1,464 
2,047 
2,038 
2,027 
2,027 
2,027 
2,032 
2,075 
2,062 


$30,345,630 
29,623,333 
30,322,738 
37,123,917 
40,325,151 
40,132,311 
43,521,087 
47,296,078 
48,282,909 
49,981,948 
52,984,322 


$20,724 


1896-7 


20,231 


1897-8 


20,709 


1898-9 


18,235 


1899-0 


19,844 


1900-1 


19,796 


1901-2 


21,467 


1902-3 


23,329 


1903-4 


23,761 


1904-5 


24,082 


1905-6.. 


25,695 







This very considerable increase of earnings has not been accom- 
plished, as with the Baltimore & Ohio, or even on the Pennsylvania, 
through a heavy increase in freight rates. The year of 1899 was 
bed-rock year for eastern roads generally, but the average freight 
rate received by the New Haven in 1906 was practically the same as 
in 1899. In other words, while the average rate of the Pennsylvania 
increased 24%, and that of the Baltimore & Ohio nearly 50%, the 
rates on the New Haven remained practically stationary. It is 
needless to say that a growth in earnings from an actual increase in 
business is a great deal healthier than from rising freight rates, and 
it is for this reason, as well as the practical monopoly which it enjoys 



NEW YORK, NEW HAVEN & HARTFORD 495 

in its territory, that the earnings of the New Haven may be regarded 
as much more stable than those of most other eastern roads. 

Maintenance. 

For years the maintenance of the New Haven has been high, 
the items for six years comparing as follows : 



Year 


Traffic Density 


Maintenance per Mile. 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


637,581 
712,651 
803,087 
817,709 
839,959 
915,909 


$2,701 
3,038 
3,077 
2,691 
2,490 
2,723 


$2,194 
2,676 
2,067 
2,315 
2,451 
2,749 


$4,895 
5,714 
5,144 
5,006 
4,941 
5,472 


Average. . . . 


787,816 


$2,786 


$2,408 


$5,194 


Bost & M 

N. Y. Cent.... 


767,535 
2,096,289 


1,813 
2,741 


1,533 
3,169 


3,346 
5,910 



Miles of extra main track, 921. 

Comparison of the maintenance charges with the Boston & 
Maine and the New York Central are given, but they are more or 
less misleading. For example, with about an equal freight density, 
the Boston & Maine's maintenance in this period averaged nearly 
$2,000 per mile less than on the New Haven, but the Boston & 
Maine shows gross earnings on only $17,000 per mile, as against 
$25,600 on the New Haven. The latter is easily in a position to 
spend more than the Boston & Maine. 

On the other hand, with an average freight density, within 
these six years, nearly three times that of the New Haven, the New 
York Central spent a total of only about $550 per mile more 
annually. But here again the Central earns only $24,300 per mile, 
as against the $25,600 for the New Haven. The difference is 
obviously due to the fact that nearly one-half of the New Haven's 
gross earnings are derived from passenger traffic, as against less 
than 30% for the New York Central, so that the comparison of 
maintenance charges with freight traffic density, here, has little value. 
What may be done is to compare the expenditures of the road with 
itself, and it will be seen that the expenditure per mile in 1906 was 
but a very little higher than the average expenditures over the six 
years. In point of fact the road spent more per mile for maintenance 
in 1902 than in 1906. Meanwhile gross earnings per mile had risen 
an even 25%. In other words, had the expenditures for 1906 been 



496 NEW YORK, NEW HAVEN & HARTFORD 

on the same scale as those of 1902, they would have been nearly 
$1,700 higher than they were, and this difference on over 2,000 miles 
of road would have made a difference of $3,500,000 in the mainte- 
nance charges, and the surplus shown would have been reduced by 
this amount. 

In point of fact, in 1906, the road set aside $3,000,000 from its 
surplus for improvements, while the improvements of 1902, amount- 
ing to $3,403,708, were charged directly to operating expenses. All 
the practical difference is, therefore, that the surplus for 1902 would 
have been $3,500,000 more, or the surplus for 1906 would have been 
$3,500,000 less than the reports show — but one more of the multiplied 
instances adduced in this work to show that surplus and income and 
all their like are largely a matter of bookkeeping. 

Improvements from Earnings. 

The following amounts devoted to betterments were noted in 
the reports as charged to operating expenses in the years indicated : 

1901-2 $2,425,815 

1901-2 3,403,708 

1902-3 1,867,817 

In the reports for 1904 and 1905 the amount charged to 
improvements was not specially indicated, and the total amounts per 
mile devoted to maintenance were rather lower than the average 
of the three preceding years, and very considerably below the level 
of 1902. It is further to be noted that in these two years the New 
Haven showed a nominal surplus which represents less than the 8% 
dividends paid on the capital stock. In 1906, after maintenance 
charges slightly above those of 1904 and 1905, the road was able 
to write off $3,000,000 from the nominal surplus shown. 



Surplus Earnings. 



The surplus earnings for six years have compared as follows 



Year 


Surplus 


Per cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Average 
Price 


1900-1 


84, 658, 288 
4,678,959 
4,826,972 
6,094,756 
6,708,053 

10,185,377 


8.7 
8.6 
6.8 
7.6 
8.3 
12.2 


8 

8 
8 
8 
8 
8 


212 


1901-2 


221 


1902-3 


197 


1903-4 


191 


1904-5 


202 


1905-6 


198 







NEW YORK, NEW HAVEN & HARTFORD 497 

The increase for 1906, amounting to 50%, is especially remark- 
able, and reference to the preceding table will show that this was 
achieved in the face of maintenance charges over $500 per mile higher 
than the previous year, or a total of $1,100,000 over 1905. There 
was a gain of nearly one million dollars in other income, but the 
larger part of this striking result was legitimately achieved through 
a reduction in operating expenses. The cost of conducting trans- 
portation was, on about the same mileage, over $1,600,000 less than 
the preceding year, and this was in the face of an increase in gross 
earnings of $3,000,000. The most important item in this saving was 
a reduction of about $950,000 in demurrage charges, that is to say, 
amounts paid on detained cars. 

The effect of this saving, in the face of considerably increased 
maintenance charges, was that the total operating expenses of the 
road were actually reduced, so that the whole gain in gross earnings 
and more was saved in the net. This with the increased other 
income produced the result shown. 

It is to be added that during the year an accident and casualty 
fund was established, into which is to be paid each six months, 2% 
of the gross earnings from passenger business. Apparently about 
$200,000 was diverted from income into this fund before showing 
the surplus of 1906. 

After charging off $3,000,000 for improvements and better- 
ments and $326,998 for the insurance fund, there still remained from 
the surplus a clear 8% for the stock. 

Dividend Record. 

The New Haven has always been one of the record dividend 
earners of the country. After the consolidation in 1872 it paid 10% 
straight through the depression of 1873-7 and down to 1893. In 
1893 its dividend was reduced to 9%, and in 1895 to 8%. It has 
remained at this level ever since. 

The Balance Sheet. 

In the item of current assets in the balance sheet at the close 
of the fiscal year of 1906, there is an entry of "Marketable Securi- 
ties" of $15,994,568. These securities have already been included 
in the item of securities owned, as shown in the capital account, and 
have been deducted from the nominal amount of current assets 
shown in the report. These securities consist chiefly of 4% deben- 
tures of the Consolidated Railway Company, and beyond the fact 
that it is the avowed intention of the company to sell them, there 

32 



498 NEW YORK, NEW HAVEN & HARTFORD 

is no more reason why they should be included in the current assets 
than any other marketable securities owned by the road. With this 
change the showing was : 

Current assets $24,033,682 

Current liabilities 21,139,552 

Leaving a working balance of $ 2,894,130. . 

The item of bills payable was rather heavy, amounting to up- 
wards of $9,000,000, in addition to $4,500,000 of audited vouchers. 

But these rather large sums were offset by $18,808,659 of clear 
cash in the treasury, so the company was fairly well off for working 
capital. 

In addition to the assets shown there were special funds in 
cash and securities to the value of $2,764,427, and the amount to 
the credit of profit and loss was $13,084,445. 

Investment Value. 

Looking back over the operations of the New Haven, one of the 
most striking facts to be noted was that after the consolidations 
completed in 1898-99, the gross earnings of the road, with prac- 
tically no change in mileage, increased $10,000,000, or more than 
25%, in the four years to the close of 1903. In the same period net 
earnings remained practically stationary. In other words, apparently 
the entire amount of the increase in earnings was absorbed in 
increased cost of operation. When the items of the latter are 
examined, it is found that there was no heavy increase in main- 
tenance charges, the principal item that had grown being the cost of 
transportation. This was not a favorable showing, and it was 
reflected in the fact that in the face of heavily increased earnings 
the percentage of surplus shown for the common stock had fallen in 
1903 to 6.8%. In other words, to pay the full 8% dividend, the 
company had to reach its hands into its previously accumulated 
funds. 

President Mellen came back to the road as president in 1903, 
and in less than three years of his administration earnings had 
increased $5,500,000, and the net had risen from $12,500,000 at the 
close of 1903 to $17,000,000 at the close of 1906. This was not 
accomplished through skimpage of maintenance charges, which 
about corresponded to the increase of traffic, but was due, as already 
noted, to decreased cost of transportation. This is scientific rail- 
roading. 



NEW YORK, NEW HAVEN & HARTFORD 499 

This improvement, especially for the year of 1906, was so 
marked that in this year the company adopted the policy, fortunately 
becoming more general among railway companies, of having the 
books and accounts of the companies examined and certified by a 
reputable firm of chartered accountants. The report adds that in 
consequence of some changes recommended and adopted in the keep- 
ing of the books, there has been a considerable reduction in the net 
income of the company from that which would have been shown 
in following the methods of making up the accounts in previous 
years. In other words, the improvement over the preceding years 
was actually rather better than the altered system of accounting in 
1906 reveals. 

It is somewhat curious to note that in the face of this handsome 
improvement in the affairs of the company, the evidence of a much 
more energetic and progressive management, the stock of the New 
Haven has considerably declined. It sold as high as $255 a share 
in the boom of 1902. It still reached $225 in 1903; but at the high 
levels of 1906, with the best showing that the company has made in 
recent years, the highest price reached was $204 per share. In the 
very moderate slump of June, 1906, the stock sold down to $191, 
and in June, 1907, to $159^, which was $26 below the lowest price 
touched in the slump of 1903-4. 

The apprehensive investor in or holder of New Haven stock will 
naturally inquire why this decline should have taken place. It was 
due in part, no doubt, to the high rates of money in 1906-7, averaging 
on time loans very nearly 6% during the year. New Haven is a 
kind of savings bank stock that is held by small investors for the 
dividends it returns, and with savings bank money at 4%, the stock 
would naturally tend to sell lower. 

But the larger cause of the decline was the rapid issue of new 
securities which always weights a stock. The average investor, it 
is certain, dislikes a policy of aggressive improvement involving the 
issue of new securities, and this fact was reflected in the average 
price of the New Haven, as it has been in the New York Central, 
the Pennsylvania, and other roads. 

The improvements planned for the New Haven were not 
completed in 1906, and if the stock could decline from $255 to $176 
per share from 1902 to 1903, it was evident that it would probably 
go considerably below 1903 on another general recession, if $204 
was the highest price it could reach in the general high levels of 
1906. It is scarcely possible that New Haven will undertake to 
increase its dividend should high rates of money prevail. It is rather 



500 NEW YORK, NEW HAVEN & HARTFORD 

doubtful, therefore, if New Haven stock would tend to sell above 
$200, and on any extensive decline in prices it would readily decline 
to a 5% basis, or lower; that is to say, to around $160 per share. 
as it did. With the highly satisfactory showing which the new ad- 
ministration of its affairs has made it is certan that there are few 
solider railway stock investments, and that at anything like these 
figures even the most cautious will probably conclude that the 
stock presents an attractive investment. 

The offer of exchange for Boston & Maine stock was on a 
basis of share for share, that is to say, an 8% stock for a 7% stock. 
Comparison of the earnings of the two roads shows that the New 
Haven's dividend was on a much solider basis than the Boston & 
Maine's, and the exchange was therefore advantageous to holders 
of the latter stock. On the other hand the results which should 
accrue from a more energetic management of the Boston & Maine 
should fully justify the New Haven's acquisition of Boston & Maine 
control. 



NEW YORK, ONTARIO AND WESTERN 

RAILWAY. 

The New York, Ontario and Western operates a line from 
Cornwall on the Hudson, to Oswego, on Lake Ontario, with track- 
age rights over the West Shore (New York Central lines), 
from Cornwall to Weehawken. In connection with the Rome, 
Watertown and Ogdensburg, the Grand Trunk and Wabash, it has 
a roundabout through route from New York to Chicago. The 
company's most available asset, however, is its coal holdings in 
Pennsylvania, which it reaches by a branch from Cadosia to Scran- 
ton, Pa. 

It was on account of its coal holdings that the control of the 
road was purchased by the New York and New Haven at the close 
of 1904, for a little over thirteen million dollars. It is for the same 
reason that the road is to be ranked as a "coaler." 

History. 

The Ontario was organized in 1880, as the successor of the 
New York and Oswego Midland Railroad. It owns its own line 
from Cornwall to Oswego, and the several branches and leased lines 
bring up its operated trackage to 546 miles. Its main business is 
distributing coal from the Pennsylvania district. 

Ownership. 

The New York and New Haven holds 291,600 shares of com- 
mon stock, and 22 shares of the preferred stock, constituting a clear 
majority of both. Out of its thirteen directors, eight are from the 
board of the New Haven, including President Charles S. Mellen, 
and vice-president Charles F. Brooker of the latter. The board 
also includes Thomas P. Fowler, president, John B. Kerr, vice- 
president and general counsel, and J. B. Childs, vice-president and 
general manager of the Ontario ; and Charles S. Whelen, of Phila- 
delphia. As the property of the New York and New Haven, the 
Ontario has naturally the same affiliations as the latter, but it has 

(501) j 



502 NEW YORK, ONTARIO & WESTERN 

no extensive holdings of other roads of its own. Two of the New 
Haven directors, J. Pierpont Morgan and William Rockefeller, are 
also directors of the New York Central. Morgan interests are 
supposed to be dominant also in the Erie, which is the other chief 
competitor of the Ontario. 

Capitalization. 

A.s of June 30, 1906, the capital account stood as follows : 

Common stock $58,113,982 

Preferred stock 4,000 

Total stock $58,117,982 

Funded debt 22,000,000 

Notes 4,025,000 

Equipment notes 462,000 

Total capital $84,604,982 

Rentals capitalized at 4% 5,112,500 

« 
Approx. gross capitalization $89,717,482 

Securities held 12,767,853 

Approx. net capitalization $77,049,629 

Approx. net capit. per mile $141,116 

Average miles operated 546 

Net earnings on net capital 3.0% 

Stock on net capitalization 75% 

Fixed charges on total net income 53% 

Factor of Safety 47% 

It will be observed that the property of the company is enor- 
mously overcapitalized, the estimated net capitalization per mile 
being about the same as that of the New York Central, with gross 
earnings per mile nearly double that of the Ontario. The net earn- 
ings show only 3% on the estimated net capitalization, which is just 
half that of the general average for the country. The larger part 
of this watered capital, however, is represented by stock, the latter 
amounting to 75% of the estimated net capitalization. The bonded 
debt of the road is not heavy, amounting to about $40,000 per mile. 
If this were represented by an equal amount of stock, the road 
would be able to pay fair dividends. As it is, the road paid its 



NEW YORK, ONTARIO & WESTERN 



503 



first dividend in 1905, from the surplus accumulated through pre- 
vious years. 

The Fixed Charges consume a little over half of the available 
net income, leaving a Factor of Safety for the underlying securities 
of 47%. 

Equities Owned. 

The treasury securities consist principally of first and second 
mortgages of the Scranton Coal Company, and the Elk Hill Coal and 
Iron Company, of a par value of about seven and a half millions 
dollars. The balance of $12,767,853 of securities owned was 
made up of the stocks and bonds of subsidiary companies. It is 
through these coal holdings that nearly half the company's gross 
earnings are derived. 

Increase of Capitalization. 

In six years the increase of capital and earnings has been as 
follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 


1900 

1906 


$58,113,983 
58,113,982 


$4,000 
4,000 


$15,437,000 
J 22, 000, 000 


$73,554,983 
80,117,982 


$4,963,483 
7,265,057 



Net increase over six years : Nominal capital, 10% ; Gross 
earnings, 46%. 

Character of Traffic. 

Of the $5,899,000 of freight earnings in 1906, $3,070,000 were 
derived from the transportation of coal. Another large item was 
the haulage of milk which brought in $688,000. These two items 
constitute an even half of the gross earnings. The passenger traffic 
represented less than 20% of the total. 

Stability of Earnings. 

Mileage and earnings through a series of years have compared 
as follows : 



Year 



1895-6. 
1896-7. 
1897-8. 
1898-9. 
1899-0. 
1900-1 . 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 



Miles Operated 



480 
480 
480 
480 
480 
480 
480 
548 
548 
548 
546 



Gross Earnings 



&3, 779,336 
3,894,403 
3,914,635 
4,346,163 
4,963,483 
5,322,884 
5,456,696 
6,176.518 
6,652,484 
7,090,889 
7,265,057 



Per Mile 



$7,927 

8,105 

8,148 

9,046 

10,331 

11,079 

11,357 

11,263 

12,137 

12,930 

13,3^9 



504 



NEW YORK, ONTARIO & WESTERN 



It will be seen that in ten years the gross earnings per mile 
have increased by over 60%, and this increase has been steady with 
practically no setback from year to year. This, in the face of the 
coal troubles, is a very satisfactory showing. 

Maintenance. 

For a number of years the company has pursued a policy of a 
very liberal appropriation for the maintenance of the road. In a 
very satisfactory report presented by the company, the items of 
maintenance are shown in extreme detail, with a demonstration that 
they have been more than adequate for the proper conduct of the 
road. For example, the allowance for repairs of engines for the 
year 1906 amounted to $2,568 per engine, as against an allowance 
of $1,372 per engine in 1897. Correspondingly, the maintenance 
per freight car amounted to $71 for the year 1906, as against $34 
in the years 1897 and 1898. In other words, while traffic density 
has not very heavily increased, these two charges for maintenance 
have been doubled. It seems fair to assume, therefore, that 
there has latterly at least been a surcharge in these items, and that 
in years of necessity the maintenance might be curtailed somewhat 
without detriment to the road. For six years the charges compare 
as follows : 



Year 


Traffic" Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


1,128,728 
1,059,135 
1,151,312 
1,268,484 
1,211,812 


$1,863 
1,689 
1,829 
1,510 
1,634 


$1,556 
1,517 
1,716 
1,818 
2,023 


$3,419 
3,206 
3,545 
3,328 
3,657 


Average. . . . 


1,163,894 


$1,705 


$1,726 


$3,434 



Miles of extra main track, 113. 



Erie 

N Y. C. 



2,368,817 
2,096,289 



1,845 
2,741 



2,890 
3,169 



4,735 
5,910 



In 1902-3-4 the surplus earnings were applied to the double- 
tracking of the line from Cornwall on the Hudson to Cadosia, 
where the branch to the coal regions strikes off. Up to June 30th, 
1906, the amount expended on this work amounted to $2,836,000. 

Surplus Earnings. 

While the gross earnings through ten years have increased by 
Vo, a large part of this was absorbed by operating expenses, due 



NEW YORK, ONTARIO & WESTERN 



505 



in large part to the policy of heavy maintenance. The net earnings 
per mile of road operated increased from $2,318 for the year of 
1897, to $3,722 for the year of 1906. The result of this was to in- 
crease the surplus earnings shown from $832 per mile to $2,175 per 
mile. 

For six years the items have compared as follows : 



Year 


Surplus 


Per cent. 

Earned on 

Common 


Dividends 
Paid on 
Common 


Average 
Price 


1900-1 


$ 879,233 

658,959 

860,972 

886,929 

1,281,277 

1,187,500 


1.5 

1.1 
1.4 
1.5 
2.2 
2.0 


4£ 
2 


32 


1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


32 
31 
29 
33 
52 



This would have been a very satisfactory showing if it had not 
been for the amount of watered capital. The surplus shown touched 
high water mark in the year of 1905, but even then it represented 
only 2.2% on the capital stock of the company. This was insufficient 
to pay any dividends except from the accumulation of surplus, as 
was done in 1905. In that year a dividend of 3% from surplus 
was declared, payable Jan. 1, 1905, and 1^2% was paid in the July 
following. In 1906 a dividend of 2% on the common stock was 
declared. 

The Balance Sheet. 

On June 30, 1906, 

The current assets showed $3,344,137 

Current liabilities 2,642,372 

Leaving a credit balance of $701,765 

The amount of cash on hand was $1,130,416. The Profit and 
Loss surplus was small, amounting at the close of 1906 to $4,907,960. 

Investment Value. 

In a careful, conservative way, the Ontario has been admirably 
managed, and has an enviable record. In twenty years its gross 
earnings per mile have increased by more than three times, and its 
net earnings per mile nearly five times. The surplus from opera- 
tion was $160 per mile in 1887. It was over $2,000 per mile in 
1905-6. This gain has been slow from year to year, due to the 
steady growth of the territory controlled by the company. It may 



506 NEW YORK, ONTARIO & WESTERN 

scorcely be doubted that under the new ownership this excellent 
management will be continued, and as the growth of business should 
also continue, the stock of the Ontario should in time prove an 
excellent investment. Now that the road has been taken over by 
the New Haven, it ought to do better perhaps than in the past. 
It provides a fairly direct line from the heart of the coal regions to 
all of lower New England without passing by New York. The New 
Haven has been double-tracking and bringing up to a high standard 
of efficiency its Central New England Railway, which crosses the 
Hudson by the Poughkeepsie Bridge, and meets the main line of the 
Ontario at Campbell Hall, N. Y. A spur of the Ontario also 
reaches to Kingston while another spur of the Central New Eng- 
land reaches RhineclirT on the opposite side of the river. 

With this new connection the earnings of the Ontario ought to 
show a steady increase, certainly not falling below that of recent 
years, even though the country in general should not be so pros- 
perous. 

It is not improbable that an endeavor will be made to maintain 
the 2% dividend declared for the year 1905-6. Such a dividend 
will just meet the interest charges on the New Haven's debenture 
bonds issued to cover the purchase price of the Ontario. The pol- 
icy of the New Haven has been that of a very liberal maintenance, 
and the disbursement of practically all the surplus remaining in 
dividends. If this policy be pursued, the shareholders of the On- 
tario may regard their 2% dividend as fairly safe under prosperous 
conditions, the absence of strikes and the like. 

On this basis, with money at 4%, the stock is reasonably worth 
from $40 to $50 per share. The price paid by the New Haven, 
with the 3% disbursement of surplus deducted, averaged $45 per 
share. The price was run up to $64 per share in 1905 in anticipa- 
tion of the 3% dividend declared that year from accumulated sur- 
plus. It sold down to $42 per share in the very moderate slump of 
May, 1906, and to $32 in May, 1907. Under any considerable 
decline in railway values the stock might go considerably lower than 
this. On the other hand, "low priced" shares seem to have a great 
attraction for certain types of investors, though the word price has 
reference merely to the bare price, and not to values. The Ontario 
has been one of the numerous "low priced" stocks which have been 
extensively manipulated in the past, its stock selling down to $19 
per share in 1903 and in 1904, with every whit as good prospects 



NEW YORK, ONTARIO & WESTERN 507 

as it had at $40 per share in 1901. Now that control has definitely 
passed to the New Haven, the floating stock has no value to other 
roads. 

Looking at the record of the company, the cautious investor 
will probably conclude that the stock would be a very good pur- 
chase at $40, still better at $30 per share, and perhaps a good thing 
to let go of, when it had risen to above $50 or $6C per share. 



NEW YORK, SUSQUEHANNA AND WESTERN 

RAILROAD. 

(Controlled by the Erie Rd.) i 

The New York, Susquehanna and Western operates a small road 
extending from Jersey City to Wilkesbarre, Pa., with a branch from 
Longwood to Middletown, N. Y. The total mileage operated is 
238 miles, with 25 miles of double track. 

In 1906 the gross earnings on all accounts were $2,757,925. 
This was about the same as the gross earnings for the previous 
year. Operating expenses slightly increased, however, but this in- 
crease was general and not due to any increase in the maintenance 
charges. As a result of the operations for the year the road showed 
a deficit of $24,332. In addition to this there were expended for 
improvements $114,380, making the total deficit for the year 
$138,713. This was after sinking fund payments of $52,940. 

The interest on the funded debt has consumed practically all 
the surplus over operating charges. 

The road has a capital of 

Common stock $13,000,000 

Preferred stock 13,000,000 

Total $26,000,000 

Bonded debt, including leased lines 15,668,000 

Total $41,668,000 

This is equivalent to $175,000 per mile, which is enormous 
capitalization for a road with gross earnings of only $11,000 per 
mile. 

No dividends have been paid on the stock since 1892. Practi- 
cally all of the stock was exchanged for Erie stock in 1898, and 
there is very little o.f it outstanding. 

The road is obviously regarded as of value to the Erie or its 
purchase would not have been made. It is, therefore, probable that 

(508) 



NEW YORK, SUSQUEHANNA & WESTERN 509 

no default would occur on its interest obligations should the deficit 
of its earnings continue. In 1905 the road showed a net surplus, 
after sinking fund payments of $92,515, and at the close of the 
fiscal year of 1906 after the payment of the deficit, there remained 
a net credit to Profit and Loss of $1,101,704. 

The total maintenance for the year amounted to $2,663 per mile, 
which was a slight increase over 1905. These figures are probably 
adequate without being excessive. 

The Erie's equity in this road probably represents nothing more 
than the advantages of having the road under its control. 



NORFOLK AND WESTERN RAILWAY. 

The Norfolk and Western was one of the important "soft 
coalers," which in 1901 was gathered into the Community of Inter- 
est plan. In that year practical control was acquired by the Penn- 
sylvania, and since that time it has shown a very remarkable pros- 
perity. 

The history of the road dates back to 1851, when the Norfolk 
and Petersburg became one of several roads controlled and in part 
owned by the State of Virginia, and afterwards consolidated into 
the Atlantic, Mississippi and Ohio Railroad. The latter fell into 
the hands of a receiver and in 1880 was reorganized as the Norfolk 
and Western Railroad, of which the present Norfolk and Western 
Railway represents a reorganization which took place in 1896. 

The company operates a fine freight line, part of it double- 
tracked, from Norfolk westward through the rich coal fields of West 
Virginia to Cincinnati and Columbus, Ohio, with an important 
branch extending up the Shenandoah Valley to Hagerstown, Md. 
The operated mileage of 1906 was 1,853 miles. 

Ownership. 

Control of the road was insured to the Pennsylvania through 
the ownership of $33,000,000 of the $89,000,000 of the capital stock 
of the road, held as follows : 

Preferred. Common. 

Pennsylvania R. R $5,500,000 $20,330,000 

Pennsylvania Co 5,000,000 1,500,000 

Northern Central Railway 500,000 1,000,000 



$11,000,000 $22,830,000 

In September, 1906, it was announced that the Pennsylvania 
had disposed of approximately one-half of its holdings, along with 
a similar proportion of its Baltimore & Ohio stock, and all of its 
holdings in the Chesapeake & Ohio. 

(510) 



NORFOLK & WESTERN 511 

As of December 31, 1906, the Pennsylvania Railroad held 
only $6,246,000 of the Norfolk & Western common and $3,246,000 
of the preferred. That is to say, the Pennsylvania, proper, reduced 
its Norfolk & Western holdings by about $16,000,000. 

The sale was made to Kuhn, Loeb & Co., Bankers, New York, 
presumably for the eventual transfer to some other interest. This 
banking firm is very closely associated with the Harriman-Frick- 
Rogers interests in the Union Pacific and other roads, and in view 
of the Union Pacific's purchase of a half of the Pennsylvania's 
holdings in Baltimore & Ohio, it was assumed that both this Norfolk 
& Western stock and the Pennsylvania's holdings of Chesapeake & 
Ohio might find their way into the same hands, this probability 
being accentuated by the fact that H. H. Rogers is building the 
Deepwater & Tidewater Railway, paralleling both the Norfolk & 
Western and the Chesapeake & Ohio into the coal fields of West 
Virginia. 

The sale of the Pennsylvania's holdings, however, brought no 
immediate change in the directorate of the road, which, in 1905-6, 
included J. B. Thayer, Samuel Rea and J. P. Green, vice- 
presidents, and W. H. Barnes; director, of the Pennsylvania, and 
James McCrea, then vice-president of the Pennsylvania Company; 
Henry Fink, chairman, L. E. Johnson, president, William G. Mac- 
dowell, vice-president, and Joseph I. Doran, general solicitor, of 
the Norfolk & Western; Victor Morawetz, chairman of the board 
of directors of the Atchison Railway, and William H. Taylor, of 
Norfolk, Va. Perhaps in consequence of a government investiga- 
tion, two of the Pennsylvania representatives, John B. Thayer and 
William H. Barnes, resigned from the board in 1906, and H. C. 
Frick and Levi C. Weir were elected in their stead. 

Mr. Frick is credited with being one of the largest single 
shareholders in the road and also in the Reading. He is a director in 
the Pennsylvania, Reading, Union Pacific, Chicago and North- 
western, Atchison and other lines, and by virtue of his extensive 
holdings has recently become one of the potent figures in the 
control of American railroads. Mr. Weir is president of the Adams 
Express Company, a director in the Iowa Central, Minneapolis and 
St. Louis, and other roads. 

The affiliations of the Norfolk and Western have been naturally 
those of the Pennsylvania Railroad, and as its nearest competitor, 
the Chesapeake & Ohio, was jointly controlled by the Pennsylvania 



512 NORFOLK & WESTERN 

and New York Central, competition in this field has naturall) been 
all but eliminated. 

Capitalization. 

As of June 30, 1906, the capital account, including $8,900 of 
preferred and $1,530,800 common stock, held in treasury, stood as 
follows : 

Common stock $66,000,000 

Preferred stock 23,000,000 

Total $89,000,000 

Funded debt 80,689,500 

Car Trusts 9,400,000 

Total capital $178,089,500 

Average capitalization per mile $96,108 

Miles operated 1,853 

Net earnings on net capital 6.4% 

Stock on net capital 52% 

Fixed charges on total net income 37% 

Factor of Safety 63% 

The company owns practically all its lines, so that the item of 
rentals paid is not considered in the estimate of capitalization, and 
on the other hand the amount of securities held is small; the one 
item about offsetting the other. The capitalization per mile is 
rather high, as is generally characteristic of reorganized roads, its 
$96,000 per mile comparing with $77,142 per mile for the Chesa- 
peake and Ohio, and $97,241 for the Baltimore and Ohio. 

The net earnings on the net capital showed a respectable figure 
of 6.7%, comparing with 7.0% for the Chesapeake and Ohio and 
7.1% for the Baltimore and Ohio. 

The capitalization of the company is well arranged, the stock 
amounting to about half, Fixed Charges consuming only 37% 
of the total net income. This leaves an estimated margin of safety 
for the bonds of 63%. 

The amount of preferred stock is not large, and the payment 
of 4% on that stock consumes only $920,000, which requires less 
than an additional 10% of 'the total net income, so that the margin 
of safety on the preferred payments is on this basis more than 
50%. 



NORFOLK & WESTERN 



513 



Norfolk and Western holdings in other companies are not 
extensive, the chief item being the entire capital stock of the Poca- 
hontas Coal Company, $1,000,000, acquired in 1901. Towards the 
development of this company's property, the Norfolk and Western 
assumed equal responsibilities with the Coal Company in the issue 
of $20,00(J,UU0 4% Purchase money bonds, due 1941, the railway 
practically guaranteeing both principal and interest. In 1906, a 
sinking fund was begun for the retirement of these bonds. Mean- 
while the Norfolk and Western and the Pennsylvania lines west of 
Pittsburg (Pennsylvania Company, etc.), agreed to make good 
deficiencies in the interest payments, two-thirds of which was to be 
made by the Norfolk and Western. In the favorable years since 
this agreement was made, the Norfolk and Western has advanced 
to the Coal Company $1,020,000 and in addition thereto, $800,000 
in cash for the purchase of additional real estate. The railway's 
interest in the company, therefore, has so far represented a small 
annual loss, but it is expected that in time the royalties received by 
the coal company will be more than sufficient to pay the interest on 
the bonds and the sinking fund requirements, and meanwhile the 
company has direct control of an important source of tonnage. 

Increase of Capitalization. 

In the six years from 1900, the company's capital has increased 
$30,600,000, or 22%, while the gross earnings have increased 102%. 
This is a remarkable record. The items compare as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1899-0. . . 
1905-6. . . 


$66,000,000 $23,000,000 $49,099,500 
66,000,000 23,000,000 80,689,500 


$138,099,500 
169,685,500 


$14,091,004 
28,487,766 



At the close of 1906, $34,000,000 of new convertible 4% bonds 
were issued, convertible into common stock at par. 



Character of Traffic. 

The largest single item in the tonnage of the road is bituminous 
coal and this, with coke, amounts to about 60% of the total tonnage. 
The company does not separately itemize its freight earnings, but 
these in 1906 comprised over 85% of the gross earnings. The 
passenger traffic amounted to only about 13%. It will be seen, 

33 



514 



NORFOLK & WESTERN 



therefore, that it is chiefly a freight road and derives the larger 
part of its earnings from the carriage of coal. 

Stability of Earnings. 

Since the reorganization in 1896 the gross earnings have 
mounted steadily, increasing from between ten and eleven million 
dollars to above twenty-eight million dollars, or nearly 180%. The 
mileage has not greatly increased, so that the earnings per mile 
have risen correspondingly, as the following table shows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


1,570 
1,560 
1,565 
1,555 
1,552 
1,560 
1,677 
1,713 
1,723 
1,799 
1,853 


$10,908,851 
10,537,723 
11,236,123 
11,827,139 
14,091,005 
15,785,442 
17,552,205 
21,160,675 
22,800,991 
24,089,260 

,28,487,766 


$6,946 


1896-7 


6,755 


1897-8 


7,179 


1898-9 


7,605 


1899-0 


9,079 


1900-1 


10,118 


1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


10,466 
12,353 
13,233 
13,390 
15,373 



Maintenance. 

Apparently the Norfolk and Western has been maintained very 
liberally, especially within the last three years, and more particu- 
larly so in 1906, when the total expenditures per mile amounted 
to $4,420. 

The charges for equipment amounted to $2,202 per locomotive, 
$628 per passenger car and $53 per freight car. This was equally 
liberal, but in view of the increase in the average freight car 
capacity, during the last three years, the average maintenance was 
not perhaps above that of the Pennsylvania standard. The items 
through a series of years were as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


1,836,135 
1,879,494 
2,124,743 
2,223,328 
2,373,674 
2,704,515 


$1,266 
1,271 
1,608 
1,660 
1,721 
1,856 


$1,460 
1,392 
1,775 
2,050 
2,177 
2,564 


$2,726 
2,663 
3,383 
3,710 
3,898 
4,420 


Average. . . . 


2,190,314 


$1,563 1 $1,903 


$3,466 



Miles of extra main track, 185. 



NORFOLK & WESTERN 



515 



C. &0 
B. & 
Penn. . 
Erie. . . 



2,057,510 

2,282,704 
3,862,125 
2,764,827 




3,382 
4,292 
8,631 
5,077 



The train tonnage of the road is high, amounting in 1906 to 
580 tons per train, and this has necessitated a great deal of recon- 
struction, the conversion of wooden bridges into steel trestles, the 
enlargement of stations, etc. The outlay for the year of 1906, in- 
cluded the relaying of 82 miles with heavier rails, considerable im- 
provement of tunnels, etc. This maintenance was certainly ade- 
quate, though it may not have been excessive. 

Improvements. 

Over and above the improvements directly charged to main- 
tenance, the company has annually set aside considerable sums for 
a betterment fund, amounting in the last six years to $15,200,000, 
as follows : 

Paid on Norfolk & 
Western-Poco- 
Year. Betterments, hontas Joint Bonds. 

1899-0 $1,500,000 

1900-1 1,500,000 

1901-2 2,500,000 $161,230 

1902-3 2,500,000 159,176 

1903-4 2,000,000 295,595 

1904-5 2,250,000 216,000 

1905-6 2,950,000 188,000 

Totals $15,200,000 $1,020,001 

In its annual report the company states that from the time 
of its reorganization to June 30, 1906, the company has expended 
for betterments a total of $41,000,000, of which $18,793,000 has 
been met from surplus income. This on the present mileage means 
about $10,000 per mile for the ten years. 

Car Trusts. 

In addition to the amounts devoted to improvements stated 
above, the company, following in this regard the general Penn- 
sylvania policy, has created car trusts, for the purpose of equip- 
ment, amounting to $12,514,000. Of these Car Trust certificates, 
there were, on June 30, 1906, $9,400,000 outstanding. 



516 



NORFOLK & WESTERN 



Surplus Earnings. 

In seven years the surplus available for improvements and 
dividends has more than doubled, leaving in each year of this 
period a surplus available for the common stock as follows: 







Dividends 


Per cent. 


Dividends 




Year 


Surplus 


Paid on 


Earned on 


Paid on 


Average 






Preferred 


Common 


Common 


Price 


1899-0. . . 


$3,389,832 


4 


3.8 




29 


1900-1. . . 


4,157,831 


4 


5. 




44 


1901-2. . . 


5,123,095 


4 


6.5 


2 


56 


1902-3. . . 


6,040,189 


4 


7.9 


2| 


64 


1903-4. . . 


5,819,302 


4 


7.6 


3 


63 


1904-5. . . 


5,833,454 


4 


7.6 


3* 


83 


1905-6. . . 


7,452,374 


4 


9.6 


4 


88 



Dividend Record. 

The dividend record for twenty-three years is as follows: 

Year. Preferred. Common. 

1883 4 

1884 Zy 2 (scrip.) 

1888 \y 2 

1889-91 3 

1892 \y 2 (and 1% scrip.) 

(Receivership.) 

1897 (new company) 1 

1898 3 

1899-00 4 

1901 4 2 

1902 4 iy 2 

1903-4 4 3 

1905 4 iy 2 

1906 4 5 

Since the reorganization in 1899 the company has always paid 
the full 4% on the preferred stock. In 1901, dividends were begun 
on the common, and the earnings for 1906 were so favorable that 
the dividend on the common stock was increased to 5%. 

The Balance Sheet. 

Excluding materials and supplies, advances to subsidiary com- 
panies, etc., the general balance of June 30, 1906, showed: 



NORFOLK & WESTERN 517 

Curret assets $6,353,111 

Current liabilities 4,605,695 

Leaving a balance of $1,747,416 

The item of cash in hand was $4,151,422, and the credit to 
Profit and Loss was $3,800,853. 

Investment Value. 

The preferred stock of the Norfolk and Western has, at least 
within recent years, had a comfortable margin of safety, and can 
be looked upon as a solid security of its class. Its 4% is non- 
cumulative and limited, so that with money ruling at 4% it is 
entitled to sell around $90 to $100 per share. As a matter of fact 
it has never yet sold at par, the highest quotation being $96, reached 
in 1905-6. In the slump of 1903-4, it went down to $51, and in 
the very moderate decline of 1906 to $90. At the latter figure its 
yield is 4.4%. 

The highest reached by the common stock in 1902 was $80 
per share and it sold off to $53 in 1903-4, rising again to $97 in 
1906, on increase of dividend to a 5% basis. 

The issue at the close of 1906 of $34,000,000 par value, of bonds, 
convertible at par into common stock, introduced a new element 
into the prospective price of the common stock, for it is evident 
that even under a still further increase of dividends the stock 
could not advance materially beyond par until the conversion was 
complete. This would add 50% to the amount of common stock 
outstanding, raising the total to $100,000,000. 

Another matter that may materially affect the value of Norfolk 
& Western securities is the construction of the Deepwater & Tide- 
water Railway, which is to parallel the Norfolk and reach into the 
same coal fields. It is stated that this road is being built by H. 
H. Rogers of the Standard Oil Co., and was undertaken because Mr. 
Rogers was unable to obtain from the Norfolk & Western a rate 
satisfactory to him, for the carriage of coal from his extensive 
holdings in coal lands in West Virginia. If control of the Norfolk 
& Western should eventually pass into hands friendly to Mr. 
Rogers, it might readily be that the new line would be taken over 
by the Norfolk & Western. But such a purchase could hardly be 
regarded by the stockholders with great favor. It would add no 
new territory and only new track, and past experience would sug- 
gest the probability that the price paid for the new line would be 



518 NORFOLK & WESTERN 

heavy. It is obvious that almost any price it would pay would be 
several times more than the cost of double tracking of the Norfolk 
& Western throughout its entire length. 

On the other hand, should the Tidewater road remain inde- 
pendent, it might prove a very interesting competitor, alike for the 
Norfolk & Western and the Chesapeake & Ohio. The interests 
behind the new road are not inexperienced, and it is being built 
to carry freight at the lowest possible cost. 

On a 5% basis, with a fair prospect of steadily increasing 
earnings, a corresponding increase in the available surplus, and 
not improbably a still further raise in the dividend, Norfolk & 
Western in times of normal money should tend to sell well towards 
par, or somewhat above. Obviously with its earnings so largely 
dependent upon a single industry, and that industry the carriage 
of coal, it would tend to sell rather below other 5% stocks with 
similar prospects, but on a broader basis of security. In the heavy 
slump of March, 1907, the stock sold down to $71 per share. At 
any such figures it would appear to be an extremely attractive 
purchase. 

With a large probability of the maintenance of rates, the in- 
vestor in Norfolk & Western would consider simply the prospective 
conditions in the coal industry, and incidentally that of the country 
at large. The capital issues of the company have been profitably 
employed heretofore, and there is no reason to suppose that money 
derived from the issue of new bonds will not be put to equally good 
use. 



NORTHERN CENTRAL RAILWAY. 

The Northern Central Railway is a back-country line, own- 
ing a road from Baltimore to Harrisburg and Sunbury, in Penn- 
sylvania, and operating thence by leases and contracts northward 
through Williamsport to Sodus Point, on Lake Ontario. The 
majority of its stock (in 1906, $9,401,950, par value) is owned by 
the Pennsylvania, and Pennsylvania representatives constitute 
a majority of the board. The other directors of 1906 were: H. 
Walters and J. D. Cameron, of New York; Luther S. Bent, Wayne 
MacVeagh and A. Loudon Snowden, of Philadelphia, and Michael 
Jenkins, of Baltimore. 

The road is officered by the Pennsylvania forces. In 1906 
it operated 462 miles of main road, and about half its freight 
tonnage was coal. 

Aside from some stocks in associated or subsidiary lines, 
the Northern Central, on January 1st, 1907, owned $1,000,000 par 
value of Baltimore and Ohio preferred and $1,048,700 common; 
likewise $500,000 of Norfolk and Western preferred, and $1,000,- 
000 common. During 1906 the company's holding of Chesapeake 
& Ohio common stock, $1,500,000, par value, was sold. 

Capitalization. 

At the close of 1906 a stock dividend of 12^% was declared 
and charged to profit and loss. Including this amount, on which 
no dividends were paid during 1906, the capital account, January 
1st, 1907, stood as follows: 

Common stock $17,193,400 

Stock dividend 2,149,168 

Total stock $19,342,568 

Funded debt 6,942,528 

Car trusts 813,755 

Total Capital $27,098,851 

(519) 



520 NORTHERN CENTRAL 

Rentals capitalized at 4% 11,780,000 



Approx. gross capitalization .$38,878,851 

Securities held 6,634,987 



$69,791 

462 

7.0% 

55% 

ft 



Approx. net capitalization $32,243,864 

Approx. net capital, per mile 

Average miles operated 

Net earnings on net capital 

Stock on net capitalization 

Fixed charges on total net income 

Factor of Safety 72% 

It will be seen that the estimated net capitalization is 
rather high and that the net earnings on this capitalization repre- 
sented 7%. 

Fixed charges were very low, amounting to only 28% for 
1906, leaving a large factor of safety for the underlying securities. 
In 1906 the company owned stocks and bonds to a par value 
of $9,572,000, of which the larger amount, aside from the hold- 
ings of Baltimore & Ohio and Norfolk & Western stock already- 
noted, was of subsidiary lines. 

Since 1900 the nominal capital increase has been small, while 
in the meantime gross earnings have increased by nearly one- 
half, as follows : 



Year 


Common 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900 


$11,462,400 
17,193,400 


$9,578,000 
6,942,528 


$21,040,400 
24,135,928 


$7,845,412 


1906 


11,632,633 







Net increase over six years: Nominal capital, 15%; gross earnings, 48% 

Stability of Earnings. 

The gross earnings have shown a considerable increase, rising 
steadily with the increased mileage, as follows : 



Year 



1896. 
1897. 
1898. 
1899. 
1900. 
1901. 
1902. 
1903. 
1904. 
1905. 
1906. 



Miles Operated 


Gross Earnings 


Per Mile 


380 


$6,286,602 


$16,675 


380 


6,732,703 


17,858 


380 


6,664,028 


17,676 


380 


7,233,417 


19,059 


381 


7,845,412 


20,591 


381 


8,266,958 


21,695 


422 


8,456,685 


20,039 


450 


10,310,086 


22,911 


461 


10,288,204 


22,315 


462 


10,531,962 


22,793 


462 


11,632,633 


25,175 



NORTHERN CENTRAL 
Maintenance. 



521 



The road has been very heavily charged for maintenance 
through a series of years, as the following table reveals : 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900 


2,874,790 
2,826,046 
2,404,224 
2,822,372 
2,658,737 
2,740,254 
3,166,490 


$2,713 
2,930 
2,628 
2,790 
2,370 
3,127 
2,968 


$3,469 
3,588 
3,385 
4,334 
4,101 
4,565 
4,742 


$6,182 
6,518 


1901 


1902 


6,013 


1903 


7,124 


1904 


6,471 


1905 


7,692 


1906 


7,710 


Average. . . 


2,798,987 


$2,789 


$4,026 


$6,815 



Improvements. 

In addition to the heavy charges the following sums have 
been set aside from surplus earnings for special improvements : 

1900 $1,011,451 

1901 1,101,139 

1902 700,000 

1903 908,484 

1904 920,681 

1905 827,000 

1906 1,100,582 

Total $6,569,337 

Surplus Earnings. 

Including the liberal appropriations noted, the road has steadily 
earned a high surplus, as follows : 



Year 


Surplus 


Per cent. 

Earned on 

Common Stk. 


Dividends 

Paid on 

Com. Stk. 


1 Average 
price ($50 
share) 


1900 


$1,695,484 
2,018,019 
1,746,547 
1,847,094 
2,077,131 
2,238,787 
2,715,788 


14.8 

17.7 

15.3 

16.2 

12. 

13.1 

15.7 


7 
8 
8 
8 
8 
8 
8 


86 


1901 


98 


1902 


115 


1903 


99 


1904 


94 


1905 


104 


1906 


104 







522 NORTHERN CENTRAL 

Dividend Record. 

For a series of years the dividend record has been as follows : 

1888 7 % 

1889 8 

1890-1 7 

1892-3 8 

1894-1900 7 

1901-06 8 

1906 . . 8 and 12^% stock 

The Balance Sheet. 

As of December 31st, 1906, the balance sheet, excluding ma- 
terials and supplies, showed : 

Current Assets $3,558,396 

Current Liabilities 2,791,689 

Leaving a working balance of $766,707 

The item of cash was $662,580 and the balance to credit of 
profit and loss, after charging off the 12^% stock dividend amount- 
ing to $2,149,168, was $1,860,467. 

Investment Value. 

In 1906 a movement of the minority stockholders for an in- 
crease of dividends, resulted in the declaration of the stock divi- 
dend already noted of 12^%. The regular annual dividend remain- 
ing the same, this was equivalent to about a 9% dividend for the 
holders of record of 1906. For present purchasers of the stock, 
however, it represents simply an 8% stock with no very immediate 
prospect for an increase of the dividend. The exceptional surplus 
shown in 1906 was eqivalent to 15.7% on the outstanding stock of 
that year and to an even 14% on the total stock, as increased by 
the stock dividend. 

It is to be noted that the earnings for 1906 were considerably 
higher than the average for the preceding four years and that 
under the increase of stock the percentage earned on the common 
has tended to decrease from the high point of 1901. The mileage 
earnings of the road have shown very little tendency to increase 
in the five or six years preceding 1906, nor has there been any 
very heavy increase in the rate of maintenance as compared with 
the traffic density. 



NORTHERN CENTRAL 523 

Through a series of years the stock has oscillated around 200 
( i.e. $100 for $50 shares) and on this basis the yield to the in- 
vestor is about 4%. The price, therefore, as compared with 
money rates of 1906-7 was high, and although the earnings of 
the stock are large, an 8% dividend does not represent much more 
than the traditional half-for-improvements half-for-dividends pol- 
icy of the Pennsylvania. It is obvious, therefore, that there were 
other stocks on the list representing the same basis of security (the 
road is largely a coal line and therefore very sensitive to the 
prosperty of this industry) with a larger prospect of profit to 
to the purchaser. 



NORTHERN PACIFIC RAILWAY. 

The Northern Pacific was one of the great traneontinental 
enterprises conceived in the war days, and at that time justly re- 
garded as a vast and momentous undertaking. The extraordinary 
growth in wealth and railway mileage of the country seems now 
to dwarf the courage and daring which these efforts at railroad 
construction across the Rockies demanded, and today the Northern 
Pacific is merely one of six huge systems which connect the Pacific 
with the Mississippi Valley. 

Involved in, and in part the cause of, two great national 
disasters, the history of the Northern Pacific is one of the colorful 
chapters of American railroading and finance. From the chaos of 
the last crash, that of 1893, the road has risen to phenomenal 
heights of prosperity, directly operating over 6,000 miles of railroad, 
possessed of interests of enormous value outside of railroading 
proper and today one of the richest and strongest railway cor- 
porations of the country. In later years it has come under practi- 
cally the same ownership as its chief rival, the Great Northern, 
and is the principal property in what is commonly known as the 
Hill-Morgan lines. 

History. 

Chartered by Congress in 1864, construction was not begun 
until 1869. The road was given a collossal land grant, 12,600 
acres to the mile in the states of Minnesota and Oregon, and 25,600 
acres per mile in the then intermediate territories. Its dominating 
genius was Jay Cooke, who had come out of the war period as one 
of the chief of American financiers. The section from Duluth to 
Bismarck on the Missouri River was completed in 1873, and in the 
same year the banking house of Jay Cooke and Company went 
down, precipitating the panic of 1873. The road was involved in the 
fall of its backers, passed into the hands of a receiver, and was 
sold under foreclosure in 1875. The company had been mon- 
strously over-capitalized, despite the enormous land grant which 

(524) 



NORTHERN PACIFIC 525 

it had received. When less than 600 miles was completed it had 
$100,000,000 of share capital, with $43,000,000 in bonds. Up to 
that time it was estimated that less than $22,000,000 had actually 
been spent upon construction, and a large part of this had been 
wasted. This was not one of the first, but it was up to that time, 
and for long after, one of the great scandals which gave American 
railroading and American securities so bad a name in Europe. 

The Cooke regime was succeeded by that of Henry Villard, 
under whose direction the work of construction was aggressively 
resumed. In September, 1883 the last spike was driven, completing 
the line through to Puget Sound and the Pacific Coast. A boom 
whose proportions have only been exceeded by that of the last two 
or three years, ensued ; vast crowds of settlers flocked to the North- 
west; the earnings of the road grew like Jonah's gourd until in 
the climatic year of 1900-1 they had reached a total of $25,000,000 
per annum, a tremendous sum compared with the general railway 
earnings of that time. 

The collapse that followed can only be described as terrific. 
In the fiscal year closing June 30th, 1893, the earnings were «till 
but a shade under $24,000,000; in the following year they had 
fallen to $16,500,000; and the net earnings, which had reached 
over $10,000,000 in the two years of 1890 and 1891, fell to a little 
over $4,000,000; that is to say, gross earnings fell a full third, and 
the net earnings a full two-thirds. The road passed again into 
bankruptcy, the Villard regime came to an end, and in 1896 the road 
was taken from the receivers by a syndicate headed by J. P. Morgan 
and Company, the Deutsche Bank of Berlin, and Drexel and Com- 
pany. The reorganization was very throughly carried out, ample 
funds for the upbuilding of the road were provided, and from 
that period to the present time its earnings have risen steadily, 
reaching in 1906 the record figure of $61,000,000. 

The average earnings per mile, which had fallen to $3,703 in 
1894, reached in 1906, $11,335. About 2,000 miles had been added 
to the road, a huge surplus accumulated, and outside properties of 
enormous value acquired. The stock of the road, which might 
have been picked up ten years before for a few dollars a share, 
was in 1906 selling at over $200 per share. 

Under the Villard regime the road had leased the Wisconsin 
Central, thereby acquiring an outlet to Chicago, but this was re- 
linquished by the receivers and permanently abandoned in the re- 
organization of 1896. But in 1901, control of the Burlington was 



526 NORTHERN PACIFIC 

jointly purchased by the Northern Pacific and the Great Northern, 
these two roads exchanging for about 98% of the stock of the 
lessee company their 4% collateral trust bonds, secured by a deposit 
of the stock so held. The exchange was on the basis of $200 per 
share. Since this purchase the earnings of the Burlington have 
very rapidly increased, and the Northern Pacific's half of the 
undistributed earnings of the Burlington comprises an asset of 
great value. Through this purchase the two roads obtained joint 
control of a line from St. Paul to Chicago, a strategic advantage 
which had been lost to the Northern Pacific through the surrender 
of the lease of the Wisconsin Central. 

In 1901 the Northern Securities Company was formed for the 
purpose of harmonizing the interests of the northerly Pacific roads, 
acquiring 99% of the stock of the Northern Pacific, and about 
75% of the Great Northern; and these two roads in turn controlled 
by ownership of stock, the Burlington system. This vast merger, 
carried out by Messrs. Hill and Morgan, raised a great outcry, and 
was violently attacked in the courts. The decision was adverse to 
the company on the ground that it was in effect the consolidation 
of competing lines ; and the stock which it had acquired was re- 
turned to its original owners. 

The immediate occasion of the formation of the company was 
the attempt of the Harriman-Union Pacific interests to secure 
control of the Northern Pacific through purchase of its stock. 
This attempt resulted in the famous Northern Pacific "corner" of 
1901, when the stock sold up to as high as $700 to $1,000 per share. 
The Union Pacific interests had acquired an actual majority of the 
stock, but their purpose was defeated through a clause in the 
articles of the reorganization, whereby the preferred stock could be 
retired at any time at the pleasure of the company. This was 
done and the Hill-Morgan interests retained and still retain control 
of the road. 

In 1901 the Canadian branches, in Manitoba, aggregating 354 
miles, were leased for 999 years to the Provincial government and 
sublet by the latter to the Canadian Northern Railway at a rental 
of $210,000 for the first ten years, with the option of purchase 
at any time for $7,000,000. 

The merger of several small roads in Washington since 1898, 
has restored to the road all of the mileage comprised in the old 
Northern Pacific system prior to the receivership of 1893, and in 
1900 the St. Paul and Duluth was merged and its bonded debt was 



NORTHERN PACIFIC 527 

assumed. The purchase carried with it rich ore lands in the Mesaba 
range. 

In 1906 the Portland and Seattle was under construction, under 
the joint ownership and control of the Northern Pacific and the 
Great Northern, designed to give these two roads a low-grade line 
from Spokane through to tidewater at Portland. ; 

Ownership. 

By 1901 James J. Hill had entered the directorate of the 
Northern Pacific and the alliance of the Hill interests with the 
Morgan interests was openly declared. After the defeat of the 
merger plan, Mr. Hill retired from the directorate and was suc- 
ceeded by his son, James N. Hill, afterwards made first vice- 
president of the road. 

The dominance of the Hill-Morgan interests is reflected in the 
directorate, which includes J. P. Morgan, Jr., Charles Steele, and 
George W. Perkins, of the firm of J. P. Morgan and Company, 
directly representing the Morgan interests; George F. Baker, presi- 
dent, and D. Willis James, a director of the First National Bank, 
New York; John S. Kennedy, also a director in the Burlington and 
vice-president of the Northern Securities Company; Lewis Cass 
Ledyard, vice-president and director of the American Express Com- 
pany, also a director of the Boston and Maine; Grant B. Schley, 
also a director of the New York, Ontario and Western; William 
Sloane, of the firm of W. & J. Sloane, New York; William P. 
Clough, 4th vice-president and general counsel of the Northern 
Securities Company; Amos Tuck French, vice-president of the 
Manhattan Trust Company, New York, and also a director in the 
Burlington; Alex. Smith Cochran, and Payne Whitney, of New 
York; Howard Elliott, president, St. Paul; and James N. Hill, 
vice-president, New York. 

The executive committee comprised George F. Baker, William 
P. Clough, Charles Steele, D. Willis James, John S. Kennedy, 
Howard Elliott, and James N. Hill. It will be seen that the Harri- 
man-Union Pacific interests are not represented on the board. On 
June 30, 1905, the Oregon Short Line, holding company for the 
Union Pacific, owned in effect, $29,390,885 of the capital stock of 
the road, but it is understood that a large part, if not all of this 
interest was subsequently sold. 

In the actual management of the road, President Hill of the 
Great Northern, is regarded as the controlling mind, and to all 



528 NORTHERN PACIFIC 

intents the Great Northern, the Northern Pacific, and the Burlington 
are operated as a single system. 

Capitalization. 

As of June 30th, 1906, the capital account of the road stood as 
follows : 

Common stock $155,000,000 

Funded Debt (not inc: Gt. Nor.-N. P. 

Joint Col. bonds) 186,345,812 

Total Capital $341,345,812 

Securities held 19,980,878 

Approx. Net Capital $321,364,934 

Approx. net capital, per mile $59,512 

Average miles operated 5,401 

Net earnings on net capitalization 9.6% 

Stock on net capitalization 48% 

Fixed Charges on Total net Income. ... 29% 

Factor of Safety 71% 

The above estimate does not include $107,612,600, the Northern 
Pacific's half of the 4% collateral bonds issued for the purchase 
of the Burlington, but does include the funded debt of several 
subsidiary roads now merged with the Northern Pacific. 

As a part of the securities held is included the value of the 
leased lines in Canada leased to the Province of Manitoba, and 
under contract of sale for $7,000,000 at the option of the lessees. 

It will be seen that the mileage capitalization is high com- 
pared with other of the north Pacific transcontinental lines, its 
$59,512 per mile comparing with $42,362 for the Great Northern, 
$28,613 for the Canadian Pacific, and about $50,000 for the estimated 
net capitalization of the Union Pacific. Although this capitaliza- 
tion is high for a road of the character of the Northern Pacific, 
its earnings have been so enormous within recent years that the 
capitalization is actually low when compared with earnings, the net 
earnings showing 9.6% on the estimated net capitalization. This 
figure compares with 10.1% for the Great Northern; 9.4% for the 
Canadian Pacific; and around 8% for the Union Pacific. 

Of the net capitalization, nearly one-half is made up of stock, 
and the Fixed Charges are extremely low, consuming in 1906, less 



NORTHERN PACIFIC 529 

than 30% of the total net income, leaving a Factor of Safety for 
the underlying securities, of about 70%. This showing, as will 
afterwards be seen, was not accomplished through any skimping 
of operating expenses. 

Equities Owned. 

Of the items of securities held, as already noted, $7,000,000 is 
represented by the price fixed upon the leased lines in Canada; the 
balance is made up principally of stocks and bonds of smaller 
subsidiary companies, representing no equities of moment. 

But the Northern Pacific has at least three other great interests, 
aggregating in value from $100,000,000 to $150,000,000, not in- 
cluded among the items of securities owned nor deducted from 
the estimated capitalization. 

The first of these is what remains of the collossal land grants, 
donated to the road by the national government. From these 
there has already been derived from cash sales an enormous sum, 
probably sufficient to have more than paid the entire actual cost of 
the road. 

At the present time nearly ten million acres of this land 
still remain. In 1906, 141,000 acres were sold for which the road 
received $1,110,000, or an average of nearly $8 per acre. Were 
the remaining lands to be valued at no more than half this amount, 
or at $4 an acre, they would still represent an asset of nearly $40,- 
000,000. In addition to the above the road had outstanding contracts 
on land sales amounting to $4,000,000. From the land sales of 
1906, $1,088,000 was carried to the credit of "The Northern Pacific 
Estate," the designation in the reports of the item usually known as 
"Cost of the Road," the amount so credited being deducted from 
this capital account. This amount does not appear as part of the 
income of the road and applies in the reduction of the new mileage 
and other charges to capital account. 

This sum is not included as a part of the estimate of the 
total net income of the road. 

The second of the Northern Pacific's large equities is its interest 
in the surplus earnings of the Burlington, over and above the 
amount required to pay the interest on the joint collateral trust 
bonds. A full discussion of this equity is to be found in the analysis 
of the Burlington road, and it is there shown that the actual surplus 
over and above reasonable maintenance charges was for 1906 around 
eight or nine millions of dollars. At least half of this might legiti- 

34 



530 NORTHERN PACIFIC 

mately have been divided between the two proprietary roads, and 
had no 'more than this been done, the Northern Pacific could have 
added at least two million dollars to its "other income" for 1906. It 
is likewise shown that upwards of twenty million dollars has been 
earned by the Burlington and put back into the road since the joint 
purchase, and half of this may be legitimately included in the 
estimate of the Northern Pacific's equity. 

It is extremely difficult to fix a valuation on an asset which 
may be arbitrarily determined among the controlling interests of 
the Great Northern and Northern Pacific, but in the event of the 
sale of the Northern Pacific's Burlington interest, it is not improb- 
able that it would receive the equivalent of at least $30,000,000 in 
some form or other, and possibly very much more. Roughly speak- 
ing, this asset might be assessed at from thirty to forty million 
dollars. Thus far the Northern Pacific has received nothing directly 
from its purchase of the Burlington and its guarantee on the 
purchase bonds. 

The third of the Northern Pacific's holdings are the rich ore 
lands in the Mesaba range acquired through the purchase of the 
St. Paul and Duluth. These are nothing like the holdings of the 
Great Northern, in extent or value, but they are still estimated to 
contain in the neighborhood of 36 million tons of iron ore. On the 
basis of the lands yielding no more than the sum fixed in the 
Great Northern's contract with the U. S. Steel Corporation, the 
average rate, if this amount of iron were mined in 24 years, would 
be at least $1.25 per ton, which would give a total valuation to the 
property of upwards of $40,000,000. It should be understood that 
only very vague estimates can be made of the actual quality of ore 
contained in these holdings. It is probably safe to say that the 
actual value of this land is at least half the gross estimate, and if 
it were assessed at $20,000,000 this would be well within its true 
worth. 

Were these ores mined at a rate to exhaust the nominal estimate 
of their amount in from 24 to 38 years, this would mean average 
receipts to the Northern Pacific of upwards of one and a half 
million dollars per year, or equivalent to about one per cent, 
annually on the outstanding amount of Northern Pacific stock. 

In addition to the holdings enumerated above, the balance 
sheet of the road showed $5,600,000 advanced to the Portland 
and Seattle Railway, now under construction jointly by the Northern 
Pacific and the Great Northern, and over and above its current 



NORTHERN PACIFIC 



531 



liabilities, improvement fund, etc., the balance sheet for 1906 showed 
quick assets, excluding materials on hand, of upwards of $7,000,000, 
an insurance fund of $2,000,000, and a balance of land department 
assets of $3,200,000. Taking all these assets and equities at the 
most conservative valuation they still showed as follows : 

Farm lands $40,000,000 

Ore lands 20,000,000 

Burlington equity 30,000,000 

Leased lines 7,000,000 

Treasury securities 13,000,000 

Seattle and Portland Railway advance . . 5,700,000 

Balance of current assets 7,000,000 

Land Department and insurance fund. . . 5,200,000 

Making a total of $127,900,000 



This would be the equivalent of three-quarters of the capital 
stock of the company. These valuations, it should be understood, 
are simply vague estimates, and would of course be very materially 
scaled under less prosperous conditions than those of 1906. Under 
favorable conditions it is probable that the estimates given are 
within 33% more or less of the realizable value, providing the 
properties were held, and the Northwest should undergo no such 
drastic set back as followed 1893. 

Increase of Capitalization. 

Since the reorganization of the company in 1896, there was no 
increase in its capital stock, the preferred stock simply being retired 
at par on January 1, 1902, for an equal amount of common stock. 
Moreover, up to 1906 there was but a very slight increase in 
the funded debt, while in six years its earnings have increased enor- 
mously. The items appear as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900.... 
1906.... 


$80,000,000 
155,000,000 


$75,000,000 
(retired) 


$171,346,596 
186,345,812 


$326,346,596 $30,021,318 
341,345,812 61,223,475 



Increase over six years: Total capital, 5%; gross earnings, 104% 



532 NORTHERN PACIFIC 

It will be seen that with an increase of capitalization amounting 
to less than 1% per annum, gross earnings of the road have more 
than doubled. Nothing couild better indicate the simply fabulous 
prosperity of the Northern Pacific's territory within this period. 

At the close of 1906 $93,000,000 of new stock was issued to 
subscribers at par, to the extent of 60% of their holdings, payments 
to be made in quarterly installments extending to January 1st, 
1909. 

Character of Traffic. 

The Northern Pacific does not separately itemize its traffic. 
Passenger earnings in 1906 amounted to about one-quarter of the 
gross, and freight earnings to a little less than three-quarters. 

The average rate per ton-mile was high compared with eastern 
roads, amounting to .83c. per ton per mile. This was against an 
average rate of 1.11c. through the depression of 1893-7, and of 1.05c. 
in 1899, which was general bedrock for the railroads of the country. 
In other words, since the reorganization the average rate has 
declined more than 25%, so that the extraordinary earnings are 
not due to an increase in the rates. But in spite of this heav> 
reduction in the average, rates are still 25 or 30% higher 
than the general average of roads east of the Mississippi, and 
while these rates could probably be maintained in highly pros- 
perous years like 1900-06, it is fairly certain that they would have 
to be still further reduced under less favorable general conditions. 

It goes without saying that a very large part of the Northern 
Pacific's traffic is the carriage of grain and especially of wheat. 
But as the mineral resources of Minnesota, Montana, Idaho and 
Washington steadily develop, especially in the direction of coal and 
iron and as the Pacific carrying trade from the Puget Sound ports 
increases, the road will be less and less dependent upon the wheat 
fields for its earnings. The steady natural gain of traffic should 
certainly be sufficient to offset the progressive reduction in the 
rates, which will doubtless continue until they have reached some- 
where near the general average of the country. 

It seems to be the intention of President Hill to make the 
Great Northern more and more of a freight road, turning over 
the tourist traffic more to the Northern Pacific, to which the 
latter lends itself more especially, while the lower grades on the 



NORTHERN PACIFIC 



533 



Great Northern permit of much more profitable freight haul, at 
lower rates. 



Stability of Earnings. 



- 



In the following table is given the record year of the Villard 
management, that of 1890-1, the panic year of 1893-4, the last year 
of the receivership, and the nine full years that have ensued since 
the reorganization of 1896: 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1890-1 


4,222 
4,468 
4,404 
4,362 
4,579 
4,714 
5,100 
5,019 
5,112 
5,262 
5,315 
5,401 


$25,151,544 
16,527,210 
19,863,160 
23,679,118 
26,048,673 
30,021 318 
32,560,984 
41,387,380 
46,142,105 
46,524,574 
50,722,886 
61,223,745 


$5,941 


1893-4 


3,703 


1895-6 


4,509 


1897-8 


5,428 


1898-9 


5,688 


1899-0 


6,368 


1900-1 


6,384 


1901-2 


8,246 


1902-3 


9,026 


1903-4 


8,841 


1904-5 


9,543 


1905-6 


11,335 







(Year of 1896-7 reported only for 10 months.) 

Under the Villard regime gross earnings had reached, in 1889- 
90, $6,272 per mile. These mileage earnings in the panic year 
were nearly cut in two, declining to $3,703 per mile. In the last 
year of the receivership they were $4,509, and in 1906, $11,331. 
In American railroad history, there are few more remarkable records 
of a swift and devastating slump and an almost pyrotechnic rise, 
the increase for the single year of 1906 amounting to $1,790 per 
mile, or a clean increase of nearly 20%. It goes without saying 
that these have been years of exceptional prosperity, and that the 
same rate of increase could hardly be maintained indefinitely. But 
the road is to-day in a position of such exceptional strength that 
it could readily meet some recession from this rapid growth without 
feeling the pinch. 

Maintenance. 

The following table reveals the extraordinary growth in the 
traffic density of the Northern Pacific within no more than six 
years. Within this period the ton mileage per mile of road operated 
has doubled, but it will be seen that the maintenance charges have 
been increased by nothing like this. The items stand as follows : 



534 



NORTHERN PACIFIC 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


478,561 
657,551 
746,467 
700,432 
820,257 
971,344 


$1,027 
1,348 
1,392 
1,263 
1,382 
1,387 


$481 
678 
760 
782 
951 

1,098 


$1,508 
2,026 
2,152 
2,045 
2,333 
2,485 


Average. . . . 


729,102 


$1,300 


$791 


$ 2,091 



Burlington 


580,024 


1,104 


1,032 


2,136 


Can. Pac 


458,589 


850 


1,002 


1,852 


Gt. North 


650,321 


960 


594 


1,554 


Union Pac. . . . 


739,206 


1,173 


1,049 


2,222 


Atchison 


577,005 


1,123 


1,113 


2,236 


Sou. Pac 


594,898 


1,446 


1,246 


2,692 



„ It will be seen that had maintenance been increased at a 
parallel rate with the increase of traffic, charges for 1906 would 
have been over $3,000 per mile, while as a matter of fact they 
were $500 a mile less than this. 

Comparing the Northern Pacific's charges with the Burlington, 
it will be seen that with a traffic density averaging through these 
six years about 25% more than the Burlington, its average main- 
tenance charges were slightly less. In 1906 the Burlington main- 
tenance was $319 per mile more than the Northern Pacific's, with a 
25% lower traffic density. The discrepancy on a basis of equal 
traffic, amounted to a full thousand dollars per mile. It is not 
easy to see why two roads not differing so very widely in territory, 
nor in character of traffic, should present so wide a difference in 
maintenance charges. 

Undoubtedly the Burlington's charges were high, but the 
difference is so great as at least to suggest a doubt if any con- 
siderable amount of earnings were concealed in the Northern 
Pacific's charges. The charges were probably adequate ; they hardly 
seem excessive. They were, it is true, considerably higher than those 
of the Great Northern, but it must be remembered that the Great 
Northern is one of the roads showing operating expenses of only 
50% of gross, against a general average of the country of 68% ; 
and it will almost invariably be found that such a showing is 
obtained at the expense of maintenance charges. 



NORTHERN PACIFIC 535 

It is improbable, for example, that the Northern Pacific can be 
maintained satisfactorily at a much lower figure than the Atchison. 
The Atchison shows about the same average traffic density over 
these six years as the Burlington, and its average maintenance 
charges for this period are slightly higher than the Burlington's. 
This again means that there is a difference in maintenance charges 
on a basis of equal traffic, of about $1,000 per mile of road be- 
tween the Atchison and the Northern Pacific. This need not mean 
that the Northern Pacific's maintenance has been skimped, but it 
does mean that on a similar basis of charges the Northern Pacific's 
surplus would have been four or five million dollars less, or the 
Atchison's surplus would have been six or seven million dollars 
more, than they were in 1906. It means at least that the surplus 
shown by the Atchison or the Burlington was on a much sounder 
basis than that of Northern Pacific, while Northern Pacific was on 
a much sounder basis than the Great Northern or the Canadian 
Pacific. 

Improvements from Earnings. 

With the Northern Pacific, as with so many other roads, how- 
ever, the maintenance charges represent only a part of the actual 
amount expended in the maintenance and improvement of the 
road. In addition to the charges shown, the following sums since 
the reorganization have been appropriated from earnings for better- 
ments : 

1897-8 $811,709 

1898-9 2,176,619 

1899-0 3,000,000 

1900-1 2,011,285 

1901-2. 3,000,000 

1902-3 3,000,000 

1903-4 3,000,000 

1904-5 3,000,000 

1905-6 6,081,980 

Total $26,081,593 

This is a solid sum and the appropriations in 1906 were 
especially heavy. In 1906, in addition to the $3,000,000 regularly set 
aside for some years for betterments, $2,000,000 was written off on 
account of the depreciation of equipment, and $1,081,980 was 
diverted from the earnings for insurance fund. 



536 



NORTHERN PACIFIC 



Since 1900 these special appropriations total over $20,000,000, 
which stands for example against similar appropriations in the 
same period of $18,057,700 for the Atchison, and $15,130,910 for 
the Great Northern, and nothing at all on the Burlington. 

While therefore the maintenance charges on the Northern 
Pacific for 1906 were hardly up to the standard of previous years, 
and that standard not excessively high as compared with other 
roads, this difference has been fully offset by the heavy appropria- 
tions from earnings, and here as always, investors will be on their 
guard against being deceived by mere bookkeeping appearances. 



Surplus Earnings. 

The surplus for six years before charging off special appro- 
priations noted above has shown as follows : 







Dividends 


Per cent. 


Dividends 




Year 


Surplus 


Paid on 


Earned on 


Paid on 


Average 






Preferred 


Common 


Common 


Price 


1900-1 


$9,213,904 


4 


7.8 


4 


113 


1901-2 


13,047,232 


1 (Retired 


8.4 


H 


. . . 


1902-3 


14,745,889 


Jan. 1,1902) 


19.5 


7 


... 


1903-4 


15,229,311 


- 


i 9.8 


6| 


. . . 


1904-5 


17,126,242 


- 


11.4 


7 


190 


1905-6 


22,487,740 


— 


14.5 


7 


205 



The surplus of 1906 was sufficient to pay the regular 7% divi- 
dend on the stock, set aside $3,000,000 for betterments, charge off 
$2,000,000 for depreciation of equipment, turn $1,081,000 into the 
insurance funds, and carry $5,500,000 to the credit of Profit and 
Loss for the operations of the year. 

But it has already been noted that had the Northern Pacific 
been maintained on the same liberal scale, let us say, as the Burling- 
ton, or the Atchison, this would have made a difference of between 
four and five million dollars in the surplus shown, or sufficient to 
wipe out the larger part of the net surplus over dividends and 
appropriations. Were such a reduction to be made the nominal 
amount earned on the stock would have represented between ten and 
eleven per cent, instead of fourteen and a half. Considering the 
high standard of maintenance which has been set within recent 
years on American railroads, it is probable that this represents more 
nearly the actual earnings for the stock than the nominal percentage 
shown in the table. 



NORTHERN PACIFIC 537 

The Balance Sheet 

At the close of the fiscal year of 1906, the road showed: 
Current assets, not including materials 

on hand $26,646,767 

Current liabilities 18,871,684 

Leaving a working balance of $7,775,083 



Of the current assets shown, $22,000,000 was clear cash. 
Nothing could better illustrate the prosperous condition of the 
road. Over and above these were the insurance funds, sinking 
fund, land department assets, advances to the Portland and Seattle 
Railway, etc., which would carry the quick assets to about $13,000,- 
000. The amount to the credit of Profit and Loss (excess of 
earnings and miscellaneous income over all payments from Sep- 
tember 1st, 1896, to June 30th, 1906) was $19,936,979. 

Dividend Record. 

In its old days Northern Pacific dividends were erratic and 
rather spare. Since the reorganization dividends were paid on 
the preferred stock from 1898, and on the common from. 1899. The 
record for a series of years is as follows : 

Year. Preferred. Common. 

% % 

1883 11.1 in certificates due 1888. 

1884-9 — 

1890-1 4 

1892 2 

1893-7, — 

1898 5 

1899 4 2 

1900-1 4 4 

1902 1 (final ; stock retired) Sy 2 

1903 — 7 

1904 — 6 and ^ extra. 

1905-6 — 7 

The subscription rights to the new issue of stock at the close 
of 1906 was equivalent to a cash dividend of from $19 to $23 per 
share. 



538 NORTHERN PACIFIC 

The Northern Pacific has joined with the Great Northern 
Railway in the construction of a new line from Spokane and 
eastern Washington, down the Columbia to Portland. This is 
designed to cut out the severe grades on the two roads which 
lie mainly in the Cascade Mountains. The new road is more 
distinctly a low grade freight line, and its construction and pos- 
sibilities are discussed in the analysis of the Great Northern. 

Investment Value. 

The Northern Pacific is another of the roads which, like 
the Atchison, the Reading, the Union Pacific, and so many 
others, has shown such a phenomenal rise in the value of its 
stock within a very few years. At the close of 1897, after more 
than a year of the operations of the reorganized company, the 
stock was still to be had for from ten to twenty dollars a 
share ; in 1900 it was still to be had for as low as $45 per share. 
In that year 4% dividends on the common stock were begun. 
In 1901 came the famous "corner," when the Harriman interests 
endeavored to gain control of the road, and Mr. Morgan sent back 
his famous message from Europe: "Buy control and hold it.''' 
The stock, which was at the time selling a little over par, rose 
as high as $700 per share, and it was reported that some of 
the unfortunate individuals known as "shorts" ; that is to say, 
people who had sold property that they did not own, settled on a 
basis of as high as $1,000 per share. Thereafter the stock was 
taken over by the Northern Securities Company, and quota- 
tions did not again appear on the stock exchange for three years 
and until the dissolution of the latter company. 

In 1905 the stock ranged between $165 and $216 per share; 
in February of 1906 it was carried as high as $232 per share, 
falling in the very moderate slump that ensued in the spring to 
$179 per share. In the slump of March, 1907, it sold ex- rights 
at $115. Wide fluctuations like this are characteristic of stocks 
that have been largely bought with great expectations, and it 
was undoubtedly great expectations which lifted the quotations 
of the Northern Pacific to so high a figure. At the average price 
of 1906 the yield to the investor was rather less than 3j^%. 
Doubtless, as a 7% stock, earning enough to pay all charges and 
needful appropriations, and still leaving enough for a margin of 
safety of 50% for its dividend, the Northern Pacific is entitled to 
sell well above $200 per share; just, for example, as does the 
Chicago and Northwestern. 



NORTHERN PACIFIC 539 

Meanwhile President Hill, who so largely dominates its 
policy, has gone on record as saying that a 7°/o dividend was 
high enough, and that with more than enough to pay this 
comfortably, the public should have the benefit of a reduction 
in rates. Should President Hill's policy obtain, then it is not 
to increased dividends that the investor will look for adequate 
returns on his investment. 

Turning to the Great Northern, we find another company 
under the domination of President Hill likewise paying 7%, with 
nominal earnings rather lower than those of the Northern 
Pacific, and selling in 1906 as high as $348 per share. Obviously 
such an enormous price as this was based upon expectations of 
some sort of a "melon-cutting," as the process of stock distribu- 
tion has come to be called. If we inquire into the history of the 
Great Northern, we shall find that since 1899, when the stock was 
put upon a 7% dividend basis, the shareholders have received 
very valuable privileges or rights to subscribe to new issues of 
stock at very much below the market quotations. The actual 
quoted value of these rights in the eight years under view 
amounts to a total of about 77% on the stock, and was in reality 
worth very much more than this to shareholders who utilized 
their privileges instead of selling their rights. This is an average 
dividend for the eight years of very nearly 10%, which, added 
to the regular 7% dividend, has made an average return to 
Great Northern stockholders of nearly 17% per annum, or nearly 
two and a half times the nominal dividend. If a solid 7% stock 
sells for an average price of around $170 per share, Great North- 
ern could reasonably have commanded on the basis of the actual 
return, well above $300 per share, or considerably above the 
average price, 

Northern Pacific shareholders up to the close of 1906 had 
had no such valuable privileges. There had been no addition to 
the capital stock. It follows, therefore, that the premium which 
Northern Pacific commanded over and above the average price 
of a 7% stock has been based purely upon expectations and not 
upon accessory dividends. These expectations obviously were 
based, first, upon its large earnings ; secondly, upon its equities. 
It has already been shown that, had only half the surplus earn- 
ings of the Burlington been distributed to its owners, this would 
have been sufficient in 1906 to pay an extra one and a half per cent, 
on the Northern Pacific stock. It has likewise been noted that 



540 NORTHERN PACIFIC 

the lease of its ore lands might reasonably yield the road an aver- 
age of about one per cent, on its capital stock per annum for the 
next twenty or thirty years. 

It has been repeatedly rumored that the Great Northern 
would take over the Northern Pacific's share in the Burlington, 
and if this were done, this would undoubtedly mean a very con- 
siderable "melon-cutting" for the shareholders. It is possible 
that the ore lands might be sold to a subsidiary company, and 
the stock of this company likewise distributed to the shareholders. 
The investor in Northern Pacific, therefore, would be speculating 
in these two possibilities, receiving meanwhile an average return 
of about Zy 2 % on the 1906 quotations, with every indication from 
the enormous earnings and satisfactory condition of the road that 
this dividend will be well earned and continue. 

So far as an increased dividend is concerned, the investor 
will consider how far the pronunciamento of President Hill is 
likely to govern the board of directors. Dividends of more than 
7% are not overly popular in Western States, so that it is much 
more likely that the surplus earnings and assets of the road will 
be distributed some other way. Although the memory of inves- 
tors is notoriously shortlived, the recollection of the tremendous 
slump which occurred in 1893-4 has undoubtedly militated some- 
what against Northern Pacific, and it is probable that in 1907 
it was selling far below the figure which its tremendous earnings 
and enormous outside assets would amply justify. 

If this is true, it may be asked why such a stock would sell 
down to $179 per share in so moderate a decline as that of 1906, 
and to $115 in 1907. The probable reason is that every stock 
which attracts a large speculative following, and is pretty clearly 
under manipulative influences, is liable to such heavy slumps ; 
and this is especially true of Western roads. The investor will 
probably conclude that such slumps are liable to occur again, 
and that he is likely to have opportunities to purchase at attrac- 
tive figures. Below $150 per share it is pretty certain that North- 
ern Pacific is cheap, even though should any very heavy general 
decline, like that of 1903, recur, it might sell considerably below 
this figure. Conditions in the Northwest have vastly changed 
since the crash of 1893 ; the country is built up, its resources 
have been developed, and the earnings of the road ought to prove 
reasonably stable. In some minds the repetition of much such 
a boom as came in the eighties has brought some legitimate 



NORTHERN PACIFIC 541 

apprehension, and it is not impossible that stock like the North- 
ern Pacific will show very wide fluctuations within the next few 
years. But the road is now solidly entrenched, where before 
it was built upon scantling, and the investor who takes advantage 
of heavy slumps should they occur, and picks the stock up for 
safe-keeping, should realize handsome returns from his holding. 



PENNSYLVANIA RAILROAD. 

The Pennsylvania, as it is familiarly known, is not only the 
greatest railroad in America, but, in point of traffic and earnings, 
the greatest in the world. For the year of 1906 its gross earnings 
were nearly $150,000,000 for the Pennsylvania proper, and for the 
entire system nearly $300,000,000. 

The operations of the system are on so enormous a scale 
that we need a standard of comparison. Its gross earnings, for 
example, are nearly equal to those of the four great "trans-conti- 
mentals": the Southern Pacific, the Atchison, the Union Pacific 
and the Northern Pacific combined. For 1906 the net earnings 
were equal to those of the Illinois Central, the Burlington, the 
St. Paul and the Chicago & Northwestern combined. 

In point of mere mileage the Pennsylvania is surpassed by 
several other American systems. Directly it operates a little less 
than 4,000 miles of main track, but the total for the entire system 
is over 11,000, and it has a potent voice in the control of nearly 
6,000 miles more. 

The total number of tons carried by the entire system in 
1906 was 363,000,000, or nearly one-quarter of the entire tonnage 
of the United States. The mere increase for the year of 1906 
over the year preceding amounted to 37,000,000, or almost equal 
to the entire tonnage of the New York Central Railroad. 

In 1905 the total number of tons carried one mile by the 
Pennsylvania Railroad alone was 16,885 millions. This was an 
increase over 1904 of 2,662 million tons. In 1905 the Wabash 
Railroad carried a total of 2,339 million tons of freight one mile ; 
the Lackawanna 2,714 million tons ; the Delaware & Hudson, 
1,782 million tons, and the Reading 1,324 million tons. In other 
words, the increase in ton mileage on the Pennsylvania was 
greater than the entire ton mileage of any of the roads named. 

These figures are for the Pennsylvania Railroad alone. All 
the lines of the system carried in 1905 a total ton-mileage of 29,- 
503 millions. This was an increase of 4,372 million tons per mile. 
The mere increase was greater than the entire ton mileage of the 

(542) 



PENNSYLVANIA RAILROAD 543 

Union Pacific, of the North Western, of the Northern Pacific, or of 
the Great Northern for the year of 1905. Put in a different way, 
had any one of these systems been added to the Pennsylvania 
system as a new division, it would not have brought so great an 
increase in freight tonnage as came in the year from the ordinary 
growth of its business. 

Including in its capitalization the stocks and bonds of its 
leased and operated lines, the gross capitalization of the Penn- 
sylvania proper exceeds three-quarters of a billion dollars, and 
that of the entire system would bring the total high above a 
billion dollars. In this sense, the Pennsylvania may be consid- 
ered to be the only billion dollar railroad in existence. 

It is a huge holding company as well, having in its treasury 
on January 1st, 1907, securities of a book value of $194,000,000, 
yielding the road more than 6% on this amount. Accruing from 
the sale of securities during the year were over $15,000,000 profits, 
of which $13,000,000 was turned into the construction of the New 
York tunnels. 

The capital expenditures for the entire system for the 
past seven years have been nothing short of colossal, being 
between 400 and 500 million dollars ; but the results were com- 
mensurate with the outlay. In that time the gross earnings of 
the entire system have nearly doubled, rising from $152,000,000 in 
1899 to $296,000,000 in 1906. The gross earnings of the second 
largest railway in the United States, the Southern Pacific, were in 
1906 only $105,000,000. The increase in earnings for the Pennsyl- 
vania Railroad alone were for the seven years, $76,000,000, or 
more than the road's entire earnings in 1899 when President Cassatt 
took hold. 

New York Central & Pennsylvania Comparisons. 

It has often been said that under the Cassatt administration the 
Pennsylvania was an extravagantly run road, and the investigation 
by the Interstate Commerce Commission in 1906, revealing the 
existence of a deal of small graft, produced a painful impression. 
Nevertheless the Pennsylvania's aggressive policy has produced re- 
sults, as the following interesting comparisons with its chief rival, 
the New York Central, for the operations of 1906, reveal : 



544 PENNSYLVANIA RAILROAD 

New York Central Pennsylvania 

Mileage 3,784 3,896 

Approximate Net Capitalization $466,000,000 $577,000,000 

Approx. Capital per mile of road operated $123,000 $145,000 

Net Earnings on Net Capital 5.8% 8.1% 

Gross Traffic Earnings $92,089,768 $148,239,882 

per mile $24,336 $37,661 

Increase (per mile) over 1905 8% 9% 

do. over 1900 33% 70% 

Freight Traffic Density (ton miles) 2,226,046 4,742,081 

[Way $2,832 $4,738 

Maintenance per mile: J Equipment 3,850 6,725 

I Total $6,682 $11,463 

Average Freight Rate • .64c .64c 

Average Train Load 403 tons 529 tons 

Train Mile earnings $2 . 59 $3.14 

Fixed Charges 64% 38% 

Surplus after charges $12,275,260 $35,674,300 

Per cent, of Surplus on Stock 8.2% 11.6% 

Surplus App. for Imp.— 7 years $16,347,260 $63,652,929 

Average Price in 1906 $139 $137 

Dividend rate for year 5|% 6£% 

The per cent, of surplus for the New York Central is reckoned on $149,- 
000,000 of stock on which dividends were paid during the year. 

History 

The Pennsylvania is one of the oldest railways of the country. 
It was originally chartered in 1848 ; its main line, built by the State 
of Pennsylvania, was opened in 1854, and operated at a loss until it 
was taken over by the present company in 1857. From this the road 
has grown steadily by accretion to its present enormous dimensions, 
partly by leases, partly by absorption, so that it now represents the 
consolidation of over two hundred smaller roads, the last notable 
addition being the Long Island Railroad. Besides the roads leased 
and operated, it owns outright or controls and operates under prac- 
tically the same management, the Philadelphia, Baltimore & Wash- 
ington, the Northern Central, the West Jersey and Seashore, and the 
Pennsylvania Company. 

The Pennsylvania Company was chartered in 1870 for the pur- 
pose of managing, in the interests of the Pennsylvania Railroad 
Company, the various lines leased and controlled by that company 
west of Pittsburg. It operates directly the old Pittsburg, Fort 
Wayne and Chicago Railroad, and owns a controlling interest in the 
Pittsburg, Cincinnati, Chicago and St. Louis (known as the "Pan- 
handle") ; the Vandalia (a recent consolidation of smaller lines) ; 
the Grand Rapids and Indiana, and a number of smaller roads. The 
Pennsylvania Railroad owns the entire stock of the Pennsylvania 
Company ($60,000,000). 



PENNSYLVANIA RAILROAD 545 

The Pennsylvania dominates the great centers of coal and 
iron production in the United States. Up to recently it has V.ad 
practically a monopoly of the Pittsburgh district, the greatest 
freight traffic center in the world. Though it is not, like the 
Reading, the Lackawanna and other coal roads, a great holder 
of coal lands, still, its coal properties are extensive, and it is to be 
ranked as one of the great "coalers." 

The affairs of the Pennsylvania were deeply involved in the 
disastrous "freight-wars/' which, through the '80s, characterized 
the railroads of the United States, and which brought the Read- 
ing, the Erie, the Baltimore & Ohio, and so many others to 
bankruptcy in 1893-6. It was this which led the Pennsylvania 
to take the lead in the development of the "Community of In- 
terest" idea, which has brought about a marked stability of rates 
and earnings, and in many cases a direct increase of rates. 

The idea involved the purchase of the stocks of other lines, 
so as to bring about, if not actual control, at least an important 
voice in the management. The result is that the Pennsylvania 
is now not only the chief traffic road of the country, but one of 
wide influence. The cost of the securities of other lines which 
it held, prior to the extensive sales of 1906, amounted to nearly 
a quarter of a billion dollars, or more than the gross capitalization 
of many important systems. 

The Pennsylvania's largest single holding (partly through 
the Pennsylvania Company), was in the Baltimore & Ohio, with 
over four thousand miles of railroad. As on January 1st, 1906, 
it owned 71 millions out of the then outstanding 184 million dol- 
lars of the capital stock of the latter road. One-half this holding 
was sold during the year and acquired by Harriman-Union Pacific 
interests. 

The Baltimore and Ohio, in its turn, owns, with the Lake 
Shore (New York Central), half of the "working control" of the 
Reading, the Pennsylvania's most direct competitor; and the 
Reading owns a controlling interest in the Central Railroad of 
New Jersey, another direct competitor of the Pennsylvania. The 
Pennsylvania owned, again with the Lake Shore, about half of 
a controlling interest in the Chesapeake and Ohio Railroad, and 
up to late in 1906 it likewise owned 33 millions out of 8/^2 mil- 
lion dollars of the stock of the Norfolk and Western, practically 
controlling that road, though one-half this interest has been 
disposed of. It also owns (through the Panhandle) one-third of 
35 



546 PENNSYLVANIA RAILROAD 

the control of the Hocking Valley Railroad, the balance being dis- 
tributed through several roads. Through the Reading it is repre- 
sented on the Board of the Lehigh Valley, so that the Erie and 
the Lackawanna were the only roads in its more immediate terri- 
tory not more or less under Pennsylvania's influence. 

Philadelphia C& Erie 

In January, 1907, the Pennsylvania completed arrangements 
for the merger of the Philadelphia & Erie, operating 307 miles of 
track between Sunbury, Pennsylvania and Erie, with 157 miles 
of double track. The line was already leased to the Pennsylvania 
Railroad for 999 years, actual net receipts being paid as rental. A 
majority of the stock was held by the Pennsylvania Railroad, 
and an offer was made to exchange the balance of the outstand- 
ing Philadelphia & Erie common stock dollar for dollar for Penn- 
sylvania Railroad stock. 

After liberal maintenance charges the surplus for 1906 
showed 10% for the common stock and 6% in dividends were 
paid. It was obvious from this that the offer made by the Penn- 
sylvania Railroad was amply justified, and, on the other hand, 
it was attractive to the shareholders of the Philadelphia & Erie. 

When the merger is completed this will add 307 miles of 
line owned to the Pennsylvania Railroad, with gross earnings in 
1906 of $8,342,875, and about the same in 1905. The exchange 
of stock will add $10,385,000 to the Pennsylvania Railroad's stock 
and $19,823,000 of indebtedness. In 1907, after liberal mainte- 
nance charges, net earnings on the Philadelphia & Erie showed 
7% on its total capital, a figure slightly under the showing for 
the Pennsylvania Railroad for the same year. 

The Philadelphia & Erie balance sheet showed an excess 
of current assets over liabilities of about $700,000, or, including 
the renewal fund, of nearly $1,000,000. The property was obvi- 
ously well worth the purchase price. 

Ownership. 

The Pennsylvania Road has the distinction of having a larger 
number of shareholders than any other road in the United 
States. The number of record in 1905 was 44,175. It is neither 
owned nor controlled by any single individual or family, but rep- 
resents more completely than any other great road ownership 
by the people. 



PENNSYLVANIA RAILROAD 547 

From June of 1899 to the close of 1906 the directing genius 
of the Pennsylvania was Alexander J. Cassatt, and to his strong 
and aggressive personality the broad and vigorous policy of ex- 
pansion of the road through these years was due. Shortly be- 
fore President Cassatt's death, H. C. Frick, of Pittsburgh, was 
chosen a director, and by many was looked upon as President 
Cassatt's possible successor. Instead, however, James McCrea, 
Vice-President of the Pennsylvania Company, at the head of 
the Pennylvania's Lines West, and a close personal friend of Mr. 
Frick, was chosen. Already popularly regarded as the largest 
single stockholder in Reading, it is generally assumed that. Mr. 
Frick will have an important voice in the Pennsylvania's coun- 
cils. As a member of the executive committees of the Chicago 
& North Western and Union Pacific, and a director of other lines, 
he had already become a powerful factor in railway affairs, 
being closely associated in the public mind with Mr. Harr-man, 
H. H. Rogers and Wm. Rockefeller; and in close association with 
these gentlemen is the banking house of Kuhn, Loeb & Co., 
which acts as the fiscal agent of the Pennsylvania, although its 
head, Jacob H. Schiff, is not a member of the Pennsylvania board. 

Through the Union Pacific's purchase of an extensive hold- 
ing in the Baltimore & Ohio and likewise in the New York Cen- 
tral, the Harriman influence is added to the already extensive 
large holdings of the Standard Oil interests in the New York 
Central and the Lackawanna. Mr. Harriman is a director in the 
Baltimore & Ohio and also in the Erie and the Delaware & 
Hudson, and with Mr. Frick in the Reading and Norfolk & 
Western, and Mr. Rockefeller and Mr. Stillman in the New York 
Central, it will be seen that the leading interests in the control 
of the larger Eastern roads are becoming more closely associated 
than ever. 

Besides Mr. Frick, the Pennsylvania's directorate was made 
up of its four vice-presidents, John P. Green, Charles F. Pugh, 
Samuel Rea and John B. Thayer; Alexander M. Fox, N. Parker 
Shortridge, Clement A. Griscom, Chas. E. Ingersoll, William 
H. Barnes, George Wood, C. Stuart Patterson, Effingham B. 
Morris, Thomas DeWitt Cuyler, Lincoln Godfrey and Rudulph 
Ellis. All of these are residents of Philadelphia and its environs. 

There is no "largest single holder" known. It will be seen 
from this list that there are no "representatives" of other ^rge 
roads on the Pennsylvania's board ; on the other hand, the P-enn- 



548 PENNSYLVANIA RAILROAD 

sylvania interest is represented on the boards of the Baltimore 
& Ohio, the Chesapeake & Ohio, the Norfolk & Western and 
other roads, proportionate to its holdings. 

Capitalization. 

Though the nominal capitalization of the Pennsylvania is 
very large, it directly owns but 1,200 miles of main track, the 
remaining 2,575 miles being operated under lease or as agent. 
From this it results that the Pennsylvania pays a larger amount 
annually in rentals than in interest on its bonded debt. The 
nominal capitalization, therefore, is far from its true capitaliza- 
tion, the stocks and bonds of its leased and operated lines amount- 
ing to much more than the nominal bonded debt. 

It would be a very difficult task to determine the actual 
amount of this subsidiary capitalization, but it may be obtained 
approximately by the method followed in this work, of capitaliz- 
ing the rentals on the basis of 4%. The rentals paid in 1906 
amounted to $12,346,754. With the sum obtained from the 
capitalization of this amount, the capital account of the Penn- 
sylvania stood as follows, January 1st, 1907: 

Capital stock $305,951,350 

Funded debt 191,561,270 

Car trusts (net) 45,141,362 

Water certificates 10,000,000 

Nominal capital $552,653,982 

Rentals capitalized at 4% 278,537,500 

Approx. gross capitalization $831,191,482 

Securities held 254,063,313 

Approx. net capitalization $577,128,169 

Approx. net capital, per mile $145,566 

Average miles operated 3,896 

Net earnings on net capital 8.1% 

Stock on net capitalization 53% 

Fixed charges on total net income 38% 

Factor of Safety 62% 

Included under the item of "Securities held" were the stocks 
and bonds of other corporations valued at $194,769,719. The 



PENNSYLVANIA RAILROAD 549 

balance comprised the sums due on the sale of Norfolk & West- 
ern and Chesapeake & Ohio stocks, loans for construction to 
subsidiary companies and $28,835,033 charged to the New York 
Tunnel extension. 

In addition to its nominal capitalization, the Pennsylvania's 
guaranties at the close of 1906 covered $383,000,000 of other 
outstanding securities. Of this, by far the larger part, $237,000,- 
000, was on the lines west of Pittsburgh and Erie and $22,- 
408,000 was on the refunding mortgage bonds of the Long Island 
Railroad. This left guaranties to the amount of $124,000,000, of 
which the larger part was on lines leased or operated by the 
Pennsylvania Railroad, and therefore forming a part of the $278,- 
000,000 capitalization of leased lines, appearing in the above 
table and computed on the basis of rentals paid. 

If to this $383,000,000 of securities guaranteed be added the 
nominal funded debt of the company, $191,000,000, and the gross 
amount of car trusts and water certificates outstanding, for 
which the Pennsylvania Company is primarily liable, $81,000,000, 
it would appear that the total of the company's obligations were 
about $665,000,000, while, if to this be added the further $60,000,000 
of notes sold in February, the total, early in 1907, exceeded $700,- 
000,000. 

The dividend and interest payments on these guaranteed 
securities amounted in 1906 to $7,868,529 on the Lines East 
and $12,292,991 on the Lines West. The larger of these guaran- 
ties and payments thereon were as follows : 

Long Island Railroad $22,408,000 $ 896,320 

Philadelphia & Erie RR 16,143,000 798,350 

tt ■*. j at t i f 21,240,400 ) , 00 ,. c 

Lmted New Jersey stock .. 1 ' V 788,4/5 

Pennsylvania Company 130,203,548 4,971,960 

Pittsburg, Ft. Wayne & Chic. 57,088,785 3,996 215 

It will be seen that the item of securities, carried at cost, 
but actually worth much more, balanced within about $24,000,000, 
the sum derived from the capitalization of the rentals of leased 
lines. The estimated net capitalization, therefore, is not very 
much higher than the nominal amount of the stocks and bonds of 
the Pennsylvania proper. 

On the basis of total mileage operated, the approximate 
net capitalization averaged $145,566 per mile. This is about two 
and one-half times the average mileage capitalization of Amen- 



550 PENNSYLVANIA RAILROAD 

can roads and is exceeded by but few lines. The figure for the 
Pennsylvania compares with $161,742 for the Reading, the high- 
est of any of the leading American roads ; $132,789 for the Lacka- 
wanna, $97,241 for the Baltimore & Ohio and $123,188 for the 
New York Central. But the gross earnings per mile of both 
the Reading and the Lackawanna are considerably higher than 
the Pennsylvania's, while the Pennsylvania's earnings in turn 
greatly exceed those of the New York Central. 

When the estimated net capitalization is compared with 
the net earnings, the Pennsylvania earns net 8.1% on its capitali- 
zation. This figure compares with 13.7% for the Lackawanna, 
10.8% for the Reading, 7.1% for the Baltimore & Ohio, and 
5.8% for the New York Central; the general average for all Ameri- 
can roads being about 6%. 

It will be seen that the Pennsylvania capitalization, on the 
basis of earnings, is high as compared with the Reading and 
the Lackawanna, but much below that of the New York Central. 

Style of Capitalization. 

But the Pennsylvania's arrangement of stocks and bonds 
is such that its Fixed Charges, compared with its total net income, 
are low. If to the $191,561,270 of funded debt of 1906 and $45,- 
141,362, the net amount of outstanding car trusts, were added 
the $278,537,500, estimated capitalization of leased lines, on 
the basis of rentals paid, we have a total equivalent to a funded 
debt of $515,240,132. This amount stands against $305,951,350 
of stock. Taking out the value of the securities held, tne stock 
represents about a full half of the estimated net capitalization, 
as against, for example, only 38% on the New York Central. 

From this it results that Fixed Charges, including all rentals, 
consumed in 1906 only 38% of the total net income, leaving a 
margin of safety for the underlying securities of 62%. This 
figure compares with a similar estimate of safety for the Read- 
ing's underlying securities of 55% ; of 62% for the Lackawanna, 
and of only 36% for the New York Central. 

But even this strong showing does not correctly represent 
the strength of Pennsylvania securities. First of all, tvvo-thirds 
of the rentals paid by the Pennsylvania are on a basis of the net 
earnings of the lines operated, and are to this extent variable and 
not fixed. Excluding this item, the actual fixed charges of the 
road in 1906 were only a little over sixteen million dollars. 



PENNSYLVANIA RAILROAD 551 

Even if we add car trust and sinking fund payments, they were 
only a little over twenty million dollars. It follows, therefore, 
that the total net income of the road could be cut down at least 
three-fifths before payments on its bonds and leases would 
become impaired. The "Factor of Safety" of Pennsylvania 
securities may be reckoned as in reality much above 60%, which 
compares with a general average for the country estimated at 
40%. 

Equities Owned. 

At the close of 1906 the Pennsylvania Railroad held in its 
treasury stocks to a par value of $237,362,917 and bonds to a par 
value of $41,663,602, or a total of $279,026,519. These securi- 
ties were carried on the books at their cost, $194,769,719. 

From these securities the company received in 1906, $11,- 
741,184, or an average return of 6.0% on its investment. In addi- 
tion to this return the company's equities were considerable. 

The largest single item of these holdings is $60,000,000 par 
value of the subsidiary Pennsylvania Company, the entire capi- 
tal stock. In 1906 the net income of the Pennsylvania Company 
was $8,933,888, nominally 14.8% on the capital stock, so that the 
company was comfortably earning its 6% dividend and might 
even have paid 7% and still kept within the Pennsylvania's tradi- 
tional policy of a dollar for dividends, a dollar for improvements. 

The next largest holding was $23,490,775, practically the 
entire capital stock of the Philadelphia, Baltimore & Washing- 
ton, comfortably earning considerably more than 10% on its 
capital stock and paying 4%. See that road. 

Outside of stocks and bonds of the companies included in 
the Pennsylvania system, the principal items were : 

Baltimore & Ohio, common $5,725,000 (par value) 

" preferred 14,273,600 " " 

Norfolk & Western common 6,246,000 

adjustm't pfd. . 3,246,000 " " 

Long Island 6,797,900 " " 

During the year the Pennsylvania disposed of all its holdings in 
the Chesapeake & Ohio, $10,130,000, par value, and the larger 
part of its holdings in the Baltimore & Ohio and Norfolk & Western, 
so that the balance remaining was very small as compared with 
the total stocks of these two companies. 



552 



PENNSYLVANIA RAILROAD 



The subsidiary Pennsylvania Company at the close of 1906, 
had securities carried on its books at a cost value of $222,321,320, 
which included chiefly the stocks of the Pittsburgh, Fort Wayne 
& Chicago, the Pittsburgh, Cincinnati, Chicago & St. Louis, the 
Vandalia, the Grand Rapids & Indiana and other companies, in- 
cluded under the designation of the "Lines West". Against these 
securities was a funded debt, including $50,000,000 of improvement 
notes, of $180,203,548. 

On the securities held, the Pennsylvania Company received 
in 1907, $7,634,271, or an average return on the book valuation 
of 3^2%. Its equity in the undistributed profits of its subsidiary 
companies was, however, considerable. 

The Pennsylvania Railroad's income of $11,741,184 from its 
securities owned was equivalent to more than 3% on its outstanding 
capital stock, and as this was considerably less than the actual 
earnings of these securities it may be regarded as solid income. 
The company might therefore have ascribed 3% of its 7% dividend 
in 1907 to dividends from investments, leaving only 4% to be earned 
by the Pennsylvania Railroad proper. The nominal surplus earn- 
ings of the railroad proper were in 1906 equal to 7.8%. 

Increase of Capitalization. 

Since the accession of President Cassatt in June, 1899, the 
increase in the nominal capitalization of the road has been very 
heavy. The items for the close of 1899 and of 1906 compare as 
follows : 



Year 


Common 
Stock 


Funded 
Debt 


Total 
Capital 


Securities 
Held 


Gross 
Earnings 


1899. . . 
1906. . . 


$129,305,500 
305,951,350 


$88,144,511 
191,561,270 


$217,450,011 
497,512,620 


$119,690,736 
194,769,719 


$72,922,984 
148,239,882 



Increase over seven years: Total capital, 129%; gross earnings, 103%. 

It will be seen from the above that in the seven and a half 
years of President Cassatt's administration, the Pennsylvania 
Railroad proper considerably more than doubled both its capital 
stock and funded debt. The total increase of stocks and bonds 
was $280,000,000. Against this, the increase of securities owned 
was $85,000,000, leaving a net increase of stocks and bonds on 
the road of $195,000,000. 



PENNSYLVANIA RAILROAD 553 

In 1899 the nominal amount of stocks and bonds, deducting 
securities owned, amounted to $34,600 per mile of road operated. 
In 1906 this sum had increased to $77,700. 

Earnings, it will be seen, did not increase correspondingly 
with the nominal capital, but if the capitalization of 1899 be 
estimated in the same fashion as in the preceding pages, it will 
be found that this anomalous result disappears. The amount 
paid as rentals on leased lines has not greatly increased within 
this period, and adding the capitalization of rentals, and deduct- 
ing the amount of securities held, the net capitalization of 1899 
was about $391,716,000 against a similar estimate of $577,128,000 
for 1906. 

The actual increase of net capitalization, therefore, was rather 
less than 50% as against an increase in gross earnings in the 
same period of 103% ; that is to say, the increase in earnings under 
President Cassatt's administration was actually much more rapid 
than the increase in the true capitalization of the road. 

In 1906 the subsidiary Pennsylvania Company made two loans, 
aggregating about $98,000,000 which amount was turned over to 
the Pennsylvania Railroad Company in exchange for $44,218,000 
of car trusts, $10,000,000 of water certificates and $36,393,432 4%% 
collateral notes of the Oregon Short Line received from the sale 
of the Baltimore & Ohio stock. The balance appeared in the 
Pennsylvania Railroad's balance sheet as an increase of $10,348,838 
in the "Pennsylvania Company Deposit Account." The item of 
$10,000,000 water certificates appears in the report of the Penn- 
sylvania Company, but nowhere in the reports of the Pennsylvania 
Railroad Company. 

The reports of the Pennsylvania have been for years models 
of completeness, and this fact made it especially notable that it 
should be necessary to put together two different reports in order 
clearly to understand so vital a transaction as an increase of about 
$64,000,000 in capital obligations in a single year. With reference 
to this, the following memorandum was furnished by the company, 
in response to a note of inquiry: 

Car Trusts, Etc., As Capital Obligations. 

"The Pennsylvania Railroad Company does not take the car 
trust certificates as an obligation upon its balance sheet, for the 
reason that these certificates are not issued by the Company but 
are issued by a Trust Company. The principal of the certificates 



554 PENNSYLVANIA RAILROAD 

represents the cost of the equipment, which is leased to The Penn- 
sylvania Railroad Company, and, under the terms of that lease, the 
equipment is all paid for in ten years. The holder of the certificates 
retains a lien upon the equipment until all of the instalments of 
principal are paid. 

"The same reasoning applies to the water certificates ; these 
are not issued by The Pennsylvania Railroad Company but are 
issued in like manner by a Trust Company, and the principal of 
the certificates is paid off in fifteen years through proportionate 
annual payments ; the result, of course, in each case being, that 
when the car trust certificates are fully paid, the equipment becomes 
the property of The Pennsylvania Railroad Company just as the 
reservoirs, pipes, and other property representing a water plant 
becomes the property of the Railroad Company when all the water 
certificates are paid. 

"The Pennsylvania Railroad Company has pursued a con- 
servative policy in charging these expenditures against its surplus 
income, and not into the capital account. - 

"In regard to the issues of the Pennsylvania Company obliga- 
tions, the Pennsylvania Company is simply a bureau of The Penn- 
sylvania Railroad Company, which owns every share of its capital 
stock; and for the same reason that the Pennsylvania Railroad 
Company takes charge of the issue of the car trusts certificates 
to cover additional equipment furnished to all its lines both East 
and West of Pittsburgh, it feels itself entirely at liberty when short 
term securities have to be issued to use the Pennsylvania Company 
for that purpose, or to use The Pennsylvania Railroad Company, as 
it may prefer. Of the $98,000,000 of securities of the Pennsylvania 
Company referred to, $50,000,000 were temporary obligations which 
mature November 1st, 1907, and to meet which the Pennsylvania 
Company now has on hand the Oregon Short Line notes and other 
securities received from the Pennsylvania Railroad Company; the 
balance of $48,000,000 represents its French Franc Loan, and with 
the proceeds of that loan it has purchased from the Pennsylvania 
Railroad Company car trust and water supply certificates, which 
will be paid for in instalments and will thus furnish the Penn- 
sylvania Company with the capital that it needs for a great deal 
of its construction work West of Pittsburgh. 

"One of the objects in view when the Pennsylvania Company 
was organized was to enable it to do just the things for which the 



PENNSYLVANIA RAILROAD 555 

Pennsylvania Railroad Company is now using it; and in granting 
its charter the State gave it certain exceptional privileges which 
are not possessed by The Pennsylvania Railroad Company under its 
charter. It. is, therefore, of special value to The Pennsylvania 
Railroad Company for this reason, and as the reports of the two 
Companies state these transactions very clearly, it is not thought that 
any obscurity or misapprehension can exist in reference thereto." 

Community of Interest Results. 

It is very interesting to compare the conditions which ob- 
tained when President Cassatt took hold of the road in 1899, 
and inaugurated the famous "Community of Interest" idea. In 
that year the earnings per ton mile of the Pennsylvania (and 
likewise for all the roads of the country generally) had sunk to 
the lowest point in its history. For the Pennsylvania the rate 
was .47c. In 1906 this had increased to .59c. This is a 24% 
increase, and on the 18,500 millions of tons moved one mile on 
the Pennsylvania, meant a difference of 22 million dollars in the 
gross earnings for 1906. This is just one-fifth of the total freight 
earnings for the year. 

Not all of this gain, however, was saved. There was at 
the same time a heavy increase in the average expenses per 
ton mile, but the average net earnings per ton mile rose from .13c. 
to .18c. This is a 46% increase, nearly one-half. The freight 
traffic of the Pennsylvania represents three-quarters of its earn- 
ings, so that the difference in rates between 1899 and 1906 meant 
a difference in net earnings on the Pennsylvania of about $9,500,- 
000. This is equivalent to nearly 3% on the capital stock and 
was 27% of the net surplus available for dividends and improve- 
ments for the year. 

In other words, were the Pennsylvania with its present capital 
and charges operating under the same conditions as 1899, it 
could scarcely have paid its present dividend. Indeed, if it were 
held to its policy of setting aside large sums for improvements 
from earnings, it could not pay much over 4 or 5%. 

It is easy to understand how deeply the Pennsylvania, as 
well as other roads of its class, is interested in the preservation 
of present conditions. A fall of 15% in the gross earnings <:f the 
road which 1899 rates would mean, would cut very heavily into 
its profits. 



556 



PENNSYLVANIA RAILROAD 
Character of Traffic. 



Of the total tonnage of the Pennsylvania in 1906, about 
10% was anthracite coal, and nearly a full third was bituminous 
coal. Coal and coke together formed 51% of the traffic. The 
largest other item was iron and steel, which amounted to about 
12^2%. The balance was made up of miscellaneous traffic, of 
which the products of agriculture were small. Six years earlier 
coal and coke formed about 57% of the traffic, so that the im- 
portance of this item has slightly declined, while that of mis- 
cellaneous traffic has increased. 

Stability of Traffic. 

The gross earnings of the road in ten years have shown a 
steady, and latterly a very marked, increase, so that with only a 
little more than half as much mileage, its gross earnings have more 
than doubled. In this period the gross earnings per mile, as the fol- 
lowing table shows, have shown an increase for each year, with the 
single exception of 1904. The recovery in 1905 was very rapid, 
and for 1906 the increase was equally large, ranging above 12%. 
The showing for 1 1 years follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896 


2,787 
2,813 
2,821 
2,847 
3,243 
2,671 
3,638 
3,656 
3,820 
3,839 
3,896 


$62,096,503 

64,223,113 

65,603,738 

72,922,985 

88,539,827 

101,329,795 

112,663,330 

122,626,419 

118,145,270 

133,921,992 

148,239,882 


$22,280 


1897 


22,830 


1898 

1899 

1900 


23,220 
25,719 
26,716 


1901 


27,602 


1902 

1903 


30,968 
33,541 


1904 


30,928 


1905 

1906 


34,512 
37,661 



Maintenance. 

The traffic density of the Pennsylvania is among the largest 
of any of the great roads of the country. It is more than double 
that of the New York Central and about five times that of the 
New Haven. The expenditures for maintenance are correspond- 
ingly heavy, amounting in 1906 to over $11,000 per mile operated. 

This is undoubtedly very liberal maintenance and could, in 
case of necessity, be considerably curtailed, probably by 10 or 



PENNSYLVANIA RAILROAD 



557 
of 



20%, without seriously affecting the road. A curtailment 
10% would be equivalent to about 1.3% on the capital stock. 

The items for the seven full years in which President Cassatt 
directed the fortunes of the company compare as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 
per Mile 


Way 


Equipment 


1900 


3,676,432 
3,458,554 
3,855,238 
4,061,330 
3,722,881 
4,398,316 
4,742,081 


$3,407 $4,072 


$7,479 


1901 


3,449 
3,831 
3,989 


4,126 
4,882 
5,417 


7,575 


1902 


8,713 


1903 


9,406 


1904 


3,348 


5.171 


8,519 


1905 


3,868 6,232 
4,378 6.725 


10,100 


1906 


11,103 










Average. . . . 


4,130,690 


$3,752 


$5,232 


$8,984 



Miles of extra main track, 2,015. 



Lackawanna . 

Reading 

Lehigh Valley 

Erie 

N. Y. Central 



3,079,629 
3,420,895 
2,771,846 
2,434,819 
2,096,289 




8,333 
8,215 
6,017 
5,077 
5,910 



It will be seen that although the Pennsylvania's charges have 
been heavy, they have not been as high, traffic considered, as some 
of its neighbor roads. With more than 33% heavier traffic, its 
average expenditures for the six years were only slightly above 
the Lackawanna's. The average traffic density for the New York 
Central was only half that of the Pennsylvania, yet its average 
maintenance charges for the period were $5,910 per mile, as against 
the Pennsylvania's $8,984. 

In other words, the Pennsylvania, with its heavy charges, has 
simply been pursuing a policy that has been general among pros- 
perous roads all over the country, and while these appropriations 
probably conceal some considerable earnings, they could not be 
heavily reduced and the standard of the road kept up, unless such 
reductions were general on competing lines. 

Improvements. 

But these charges represent only a part of the very large 
sums which have been spent on the Pennsylvania from earnings 
since the beginning of the Cassatt administration. In addition to 
the ordinary maintenance charges the following sums have been 



558 PENNSYLVANIA RAILROAD 

written off the surplus and turned back into the improvement of 
the road within the period named : 

1899 $3,495,559 

1900 7,090,329 

1901. 10,824,595 

1902 12,500,000 

1903 9,472,728 

1904 6,220,922 

1905 8,842,881 

1906 8,701,474 

Total $67,148,488 

This is equivalent to $17,217 per mile of road operated. This 
is nothing like so large as the Lackawanna's appropriations, 
and does not, as in the latter case, amount to practical recon- 
struction of the road; but it is nevertheless a very large figure; 
for example, more than four times that of the New York Central. 

Very considerable payments have likewise been made on car 
trusts and sinking funds from earnings, which since 1900 have 
been as follows: 

1900 $506,036 

1901 2,009,236 

1902 2,002,984 

1903 3,240,848 

1904 3,836,909 

1905 3,563,651 

1906 4,503,165 

Total. . . $19,662,829 

This with the sum appropriated for improvements makes a total 
of upwards of $86,000,000 of earnings turned back into the road 
within eight years. 

Within the same period $110,000,000 was paid to the stock- 
holders in cash dividends. The difference between the two 
amounts is considerable, but there were various other payments, 
so that the Pennsylvania under President Cassatt fairly well 
maintained its traditional policy of "a dollar for dividends, a dol- 
lar for improvements. " 



PENNSYLVANIA RAILROAD 559 

Dividend Record. 

The Pennsylvania enjoys the distinction of having paid con- 
tinuous dividends for a longer period than any other American 
road, and since 1860, for forty-seven years it has never gone 
through a single year without the payment of a dividend. In 
this period it has paid out upwards of $270,000,000 in cash to its 
shareholders. The record from 1871 is as follows : 

1871-4 10% 

1875-6 8% 

1877...... 4% 

1878 2% 

1879 A%% 

1880 6% and 1% in scrip 

1881 8% 

1882-3 Sy 2 % 

1884 7% 

1885-6 5% 

1887 sy 2 % 

1888-9 5%> 

1890 sy 2 % 

1891-2 : 6%> 

1893-9 5% yearly 

1900-6 6% yearly 

1907 7% 

i 

Surplus Earnings. 

Even under its policy of liberal maintenance, the Pennsylvania 
has always earned much in excess of its dividend payment. The 
following table shows the "Margin of Safety" for dividends under 
President Cassatt's administration. The average per cent, of sur- 
plus on common stock was 10.5% as against 5.8% on dividends paid. 
The Factor of Safety on dividends of the eight years, therefore, has 
been regularly above 50%. 

Towards the close of 1906 the stock was put on a 7% basis 
through the payment of a regular semi-annual dividend of 3*/2%. 
This brought the dividend rate for the year up to 6^% and called 
for a disbursement of $19,900,000 out of a total surplus shown of 
$35,700,000. In 1905 the 6% dividend consumed $18,000,000 out of 
the surplus shown of $30,000,000, so that the company was ap- 
parently better able to pay a 7% rate in 1906 than a 6% rate in 1905. 



560 



PENNSYLVANIA RAILROAD 



Year 


Surplus 


| Per cent. 
Earned on 
Common 


Dividends 
Paid on 
Common 


Average 
Price 


1899 


$11,493,801 
17,277,530 
22,194,330 
27,321,687 
27,506,507 
27,990,866 
30,102,516 
35,674,300 


8.8 

11.4 

10.9 

13.4 

9.3 

9.3 

9.9 

11.6 

10.5 


5 

6 
6 
6 
6 
6 
6 
6£ 

5.8 


128 


1900 

1901 

1902 

1903 


133 
142 
148 
129 


1904 

1905 


123 
142 


1906 


137 







The full 7% dividend in 1907 requires a disbursement of 
upwards of $21,000,000, and is the largest dividend payment of any 
railway in the world. 

The Balance Sheet. 

In the report for 1906, the balance sheet is made up in more 
detail and a distinct gain of information afforded. For example, 
the very considerable and very vague item of miscellaneous assets, 
amounting to $18,921,933 is largely sorted out and reduced in 1906 
to a figure much more in keeping with a policy of clearness and 
publicity. 

Excluding materials on hand, the sheet shows : 

Current Assets of $67,910,502 

Current Liabilities of 35,368,060 



Leaving a working balance of $32,542,442 

Not included in current liabilities was an item of $13,709,163, 
deposit account of the Pennsylvania Company. Inasmuch, how- 
ever, as the latter company is quite solvent and all its stock is 
owned by the Pennsylvania Railroad Company, the matter is 
largely one of bookkeeping. 

The item of cash on hand and on deposit amounted to $43,- 
170,122 and it is to be noted that there was an additional item 
included in the current assets, of accounts receivable from the 
sale of the Norfolk & Western and Chesapeake & Ohio stocks of 
$15,492,685. This item has already been grouped under the 
securities held in the estimate of capitalization, but it is really 
a quick asset and may properly be entered as such. It will be 
seen, therefore, that the company was well provided with cash 
and working capital, the increase in cash over the balance of 



PENNSYLVANIA RAILROAD 561 

the previous year being upwards of $16,000,000. In a company 
carrying on tremendous expenditures for improvements as is the 
Pennsylvania, these items have less significance however, than 
otherwise. 

The balance to the credit of profit and loss at the close of the 
year was $24,725,484. 

Car Trusts. 

Not showing on the general balance sheet, as is customary, 
were outstanding car trust certificates at the close of the year of 
$71,018,000 on the 94,873 cars obtained under these trusts. About 
one-third were sublet to subsidiary companies, so that the net 
actually chargeable against the Pennsylvania Railroad was $45,141,- 
362, which is the amount included in the estimate of capitalization 
here given. 

The total payment on these car trusts for the year was $8,679,- 
397, of which amount $5,320,397 was paid by the Pennsylvania Rail- 
road and the balance by its subsidiary companies. This included 
both interest and principal. 

The Pennsylvania is one of the few roads of high standing 
which resorts to car trusts as a means of securing equipment. This 
method is generally significant of poverty and poor credit. It 
amounts to the same as buying furniture on the installment plan, 
which is usually expensive. But the amount which these car 
trusts add to the total indebtedness of the Pennsylvania is com 
paratively small. 

Investment Value. 

The Pennsylvania was put on a 6% basis in the first year of 
President Cassatt's administration. So it remained until the close 
of 1906, when the rate was advanced to 7%. As a 6% stock the 
Pennsylvania had fluctuated between a high point of 170 in Septem- 
ber of 1902 to a low point of 110 in the winter of 1903-4. In the 
recovery of 1905 it sold up to 148. As a 7% stock the highest 
quotation was 145 and within 5 months thereafter, at the beginning 
of 1907, sold down below 115. 

This was a violent fall for a stock of the solid investment value 
of the Pennsylvania and meant that the stock was selling on a 6% 
basis, a point it had not reached since 1891, when on a 6% dividend 
Pennsylvania sold down to 99. Even in 1893, when the Penn- 

36 



562 PENNSYLVANIA RAILROAD 

sylvania reached bedrock, it sold down to only 93, on a 5% basis. 
The price of 1907 was, therefore, relatively the lowest point for 
Pennsylvania in 16 years. Undoubtedly this was due in part to the 
prevailing rates for money, still more to the enormous outpour of 
Pennsylvania securities under the Cassatt administration and partly 
to a doubt as to the wisdom of the 7% dividend under existing con- 
ditions. 

At the close of 1906 there were outstanding $20,000,500 of the 
3y 2 % 10-year bonds convertible at 140, and $99,624,500 of the 
3^% 10-year bonds convertible at 150. The effect of the full 
conversion of these bonds would be to add $80,950,000 to the stock 
capital of the road and this on a 7% basis would call for $5,667,000 
in dividends as against about $4,200,000 fixed charges on the 3^% 
bonds — an increase of nearly $1,500,000. This, added to the $3,000,- 
000 required for each added 1% dividend on the existing stock 
would mean a total increase of dividend disbursements of about 
$4,500,000, or an increase of a full 25% over the charges on the 
same securities in 1906. 

It was understood that large amounts of these bonds had been 
taken by syndicates and that when in the fore part of 1906 Penn- 
sylvania found itself in need of further funds in a tight money 
market, the declaration of a 7% dividend was insisted upon by 
the banking interests in order that they might unload their sup- 
ply of convertibles. If this was a fact, the plan was not a suc- 
cess. Conversion of the 1912 bonds into 7% stock at 140 would 
mean a flat rate of 5%, and on the 1915 bonds at 150, of 4.46%, a 
gain over the previous yield of 43% and 32%, respectively. But 
in the face of the opportunity to increase the interest return to 
this very considerable extent, up to January 1st, 1907, practically 
no further conversion of the bonds had taken place, and in March 
of 1907 the bonds sold at the lowest price in their history. 

The case is an illustration of the fact that with careful and 
intelligent investors, it is earnings and not dividends which deter- 
mine values and a misjudged increase of the dividend may lower, 
rather than raise the price of a security. 

Nevertheless, if the fall in the price of Pennsylvania stock in 
1907 meant anything more than that the price of best railway securi- 
ties, standard stocks, was at that time tending towards a 6% 
basis, it would seem that this was a case of serious misjudgment 
on the part of investors. It has already been pointed out that 
the Pennylvania's income from its investments was equivalent 



PENNSYLVANIA RAILROAD 563 

in 1906 to about 3% on its outstanding capital and that in these 
securities were very considerable equities, sufficient to make the 
return a solid one. The company has then to earn only 6 or 8% 
from its actual operations as a carrier to comfortably pay an addi- 
tional 3 or 4%, and still have ample funds to devote to improve- 
ments. 

It has been pointed out in the discussion of maintenance, 
that the Pennsylvania's items have been very heavy, and while 
with the rise in prices of labor and materials the amount of con- 
cealed earnings here may not be large, it is fairly certain that 
under any drastic set-back of business, labor and materials would 
fall in prices sufficient to give the road a considerable margin 
for retrenchment in this quarter. It would seem, therefore, that 
nothing short of such a storm as broke over the country in '57 
could seriously impair the Pennsylvania's investment value, and 
unless the high interest rates of 1906-7 continue, as scarcely seems 
probable, Pennsylvania on or somewhere near a 6% basis would 
seem a very attractive purchase. 

The New York Tunnels. 

Probably no single undertaking of President Cassatt's has 
tended more to weight the stock of the Pennsylvania than the 
tunnel extension from the Jersey shore into New York City and 
the purchase of terminals in the heart of Manhattan, at naturally 
a very heavy expense. Yet this extension is a part of the bold 
and far-sighted project which will immeasurably strengthen the 
Pennsylvania and undoubtedly earn dividends on whatever out- 
lay this extension involves, even though it should exceed one 
hundred millions of dollars. 

Before this work was begun the terminals of the Pennsyl- 
vania, the chief railroad in America, in their relations to New 
York, the chief city of America, were very much the same as if 
the New York Central were to stop on the hither side of the 
Harlem River. Simply by tunnelling under the Hudson and 
obtaining a direct entrance for its trains into the city, the Penn- 
sylvania will largely increase its passenger traffic and practi- 
cally force its rivals on the Jersey shore to the same undertaking- 
By obtaining control of the Long Island Railroad, and by continu- 
ing its tunnels under Manhattan and under the East River, it will 
be able to run its passenger trains through to the seaside places of 
Long Island without change. And yet again, by the construction 



564 PENNSYLVANIA RAILROAD 

of the bridge over the East River, connecting its lines with the 
New Haven terminals, it will be able to run its trains through 
from Boston to the farthest parts of its system. With the lines of 
the Boston & Maine absorbed by the New Haven, the alliance of the 
New Haven and the Pennsylvania would naturally tend to become 
much closer. 

The predicted decadence of New England's industries has 
not yet arrived, and with a through freight route from its chief 
manufacturing centers to the west and south, via the Pennsyl- 
vania's lines, New England will be in a better position than ever 
to meet the steadily growing competition of manufacturing in 
other centers. All this must inevitably contribute to the Penn- 
sylvania's traffic and to solidify the position of that road as the 
great goods carrier of America. 

In the report of 1906 it is stated that $13,000,000 was charged 
off from the profit derived from the sale of Baltimore & Ohio and 
other securities during the year, and devoted to the cost of the 
tunnel extension. The sum of $5,000,000 was similarly charged off 
for premiums in 1903, and $5,000,000 more in 1905, which 
amounts are to be added to the $28,835,033, the amount at which 
the tunnels were carried on the balance sheet of 1906, making 
a total of $51,835,033 representing the total expenditure on the 
tunnels to the close of 1906. It is evident that with the rise in 
materials and labor and some engineering difficulties encountered 
in the East River tunnels, the cost of this work will considerably 
exceed anticipations, but at the outside, it can scarcely involve 
the expenditure of more than one hundred millions, and it would 
be surprising if, after deducting the cost of ferriage which these 
tunnels will save, the road could not comfortably earn net 7 or 
8% on this sum. The cost of transfers and reshipment is always 
large and the saving that will be effected in these items will be 
considerable, while the stimulus to traffic which these extensions 
will afford should be sufficient easily to make up the balance of 
charges. 

The steady growth of New York City, like that of London 
and other great centers, makes it clear that an enormous business 
will inevitably accrue to the roads which will put themselves 
in a position to handle this traffic at the lowest possible cost. 
Whatever may be the result of the first few years, it is scarcely 
to be doubted that the New York extension will in time be looked 



PENNSYLVANIA RAILROAD 565 

upon as one of the master strokes of President Cassatt's bold 
policy. 

The Convertibles. 

Under the high interest rates prevailing in 1906 and 1907, 
the 1912 convertibles, exchangeable at 140, sold down in 1907 as 
low as 94 and the convertibles of 1915, exchangeable at 150, 
slightly below 90. At these low figures the conversion price was 
equivalent to 132 and 135, respectively. It scarcely seems prob- 
able that high interest rates are a permanence and with the 
return to the normal level of previous years, there seems little 
doubt that Pennsylvania stock will tend to sell above 150. To the 
investor who is willing to wait, therefore, it would appear that at 
anything like these figures, these convertibles are an attractive 
purchase and that eventually they should yield a handsome 
profit to their holders. 



THE PENNSYLVANIA COMPANY. 

The Pennsylvania Company is simply a subsidiary operating 
company for the Pennsylvania Railroad, and its entire capital 
stock is owned by the latter. It controls all the Pennsylvania 
lines west of Pittsburg, and it is in addition a huge holding com- 
pany. The total of securities owned is carried on the books of the 
company at $232,000,000. This includes controlling interests of a 
number of companies subsidiary to the Pennsylvania, and in addition 
large interests in the Baltimore & Ohio, the Cambria Steel Com- 
pany, the Pennsylvania Steel Company, the Norfolk & Western, etc. 

Within latter years the company has earned a handsome 
surplus, but prior to this time it was not a source of great profit 
to the parent company. In 22 years it has shown a nominal 
deficit five times, even before meeting its interest charges. In 
24 years it has paid a dividend in only ten, and the average return 
to the parent road, on its stock, for this period was only about 
1.5%. 

History. 

The Pennsylvania Company was chartered by the Legisla- 
ture of Pennsylvania in 1870, and began operating in the year 
following, taking over the lines owned and leased by the Penn- 
sylvania railroad, west of Pittsburgh. The principal of these 
was the old Pittsburgh, Fort Wayne and Chicago. In 1905 the 
capitalization of the company was increased from $40,000,000 to 
$60,000,000. 

The main line of the Pennsylvania Company extends from 
Pittsburgh to Chicago, and in 1906 it directly operated 1,410 
miles. It directly controls the Pittsburgh, Cincinnati, Chicago 
and St. Louis (1,429 miles), the Vandalia (777 miles), the Grand 
Rapids and Indiana (574), and a number of minor companies (792 
miles). In 1906 the total, including mileage operated under track- 
age rights, was 5,048 miles. 

The entire capital stock being held by the Pennsylvania Rail- 
road Company, the directors are simply representatives of that 
line. i 

(566) 



PENNSYLVANIA COMPANY 567 

Capitalization. 

It is somewhat difficult to arrive at the true capitalization of 
the Pennsylvania Company for it directly owns no track; in other 
words, it is simply a leasing company. 

In 1906, including the rentals paid on roads operated on a 
basis of net earnings, the company paid rentals of $9,287,879 as 
against $4,014,568 interest on its funded debt. On the other 
hand, it received in dividends and interest from its investments 
$7,634,271. The latter sum was equivalent to about 3.4% on the 
book valuation of the securities owned. 

Obviously if the rentals be capitalized on the basis of 4%, in 
pursuance of the plan of this book, while the securities owned be 
taken at the book valuation of the company, the latter being 
largely securities of leased and operated companies, the result 
would be to lower the actual capitalization. The estimate which fol- 
lows, therefore, is only a rough approximation. As of January 
1st, 1907, it would stand: 

Common stock $60,000,000 

Funded Debt 130,203,548 

Notes 50,000,000 

Total Capital $240,203,548 

Rentals capitalized at 4% 232,195,000 

Approx. gross capitalization $472,398,548 

Securities held 222,321,320 

Approx. net capitalization $250,077,228 

Approx. net capit. per mile $177,359 

Average miles operated 1410 

Net earnings on net capital 5.8% 

Stock on net capitalization 24% 

Fixed charges on total net income 62% 

Factor of Safety 38% 

It will be seen that on this estimate the net capitalization 
per operated mile is very high, especially as compared with other 
roads in the same territory. It stands against a similar estimate 
of $78,987 per mile for the Lake Shore, $69,150 for the Wabash 
and $101,311 for the Panhandle. 



568 PENNSYLVANIA COMPANY 

On this estimate of the net capitalization net earnings show 
only 5.8% as against 6.6% for the Panhandle, 3.9% for the 
Wabash and 12.7% for the Lake Shore. 

It will be seen that the proportion of stock to the estimated 
net capital is small — only about 24%. It is easy to see, there- 
fore, that fixed charges, including rentals would be high, amount- 
ing in 1906 to 62%, leaving a factor of safety of about 38%. This 
is just reversing the proportions shown by the parent Pennsyl- 
vania Railroad. 

The gross capitalization for 1906 showed a very heavy in- 
crease, amounting — all told — to about $118,000,000. Of this, 
however, $105,844,645 was increase in the securities owned by the 
company. The larger part of the new capital was turned over to 
the Pennsylvania Railroad, in return "for car trust and water 
certificates and other securities of an amount substantially equal 
to the obligations incurred." The only apparent reason for this 
curious bit of financing was to make less obvious the Pennsyl- 
vania Railroad's actual increase of about $64,000,000 in capital 
obligations. As noted in the analysis of the parent company, the 
item of $10,000,000 water trust certificates appearing in the re- 
ports of the Pennsylvania Company was nowhere to be found in 
the reports of the Pennsylvania Railroad Company. 

Equities Owned. 

The total par value of the stocks and bonds owned by the 
Pennsylvania Company at the close of 1906 was $277,488,639, 
carried on the books, as already noted, at a valuation of $222,- 
321,320. Of these securities there was deposited as collateral 
under the various mortgages and trust obligations, stocks of a 
par value of $146,775,650, leaving about $130,000,000 of stocks free 
in the treasury. 

The principal items in these holdings were : 

Baltimore & Ohio, Pfd $5,000,000 

Baltimore & Ohio, common 13,451,200 

Cambria Steel Company 22,504,100 

Grand Rapids & Indiana Ry 2,902,600 

Ore. Short Line 4^ Collateral Notes 36,393,432 

Norfolk & Western, Pfd 5,000,000 

Norfolk & Western, common 1,500,000 

Pitts, Cin., Chic. & St. L., pfd 22,470,700 

Pitts, Cin, Chic. & St. L, common 14,587,500 

Pennsylvania Steel Company, common 7,388,900 

Pennsylvania Terminal Ry Co 100,000 



PENNSYLVANIA COMPANY 569 

Pitts., Ft. Wayne & Chic, guaranteed special.... 33,443,400 

Vandalia R. R. Co 11,633,400 

Pennsylvania Trust Certificates 2,700,000 

Pennsylvania Gold Certificates 9,300,000 

Pennsylvania Improvement Certificates 10,000,000 

Pennsylvania Equipment Certificates 22,218,000 

Pennsylvania Water Supply Certificates 10,000,000 

The holdings in B. & O. preferred increased by about $2,- 
404,600 and in the Pittsburgh, Ft. Wayne & Chicago, guaranteed 
special, by $3,029,300. 

The value of the B. & O. holdings have increased very con- 
siderably since their purchase and likewise large holdings in the 
Panhandle in 1906 earned about 12% on its common stock, above 
the preferred dividend. The Cambria Steel stock received 3% in 
1906, the Pennsylvania Steel, preferred, 7%. 

The $36,000,000 of Oregon Short Line notes was the balance 
of the amount received by the Pennsylvania Railroad Company 
on the sale of its B. & O. holdings and turned over to the Penn- 
sylvania Company in exchange for cash. 

The 3.4% on the book valuation of these securities, repre- 
sented by the $7,634,271 income received in 1906, does not fairly 
represent the actual income from these securities since on $54,- 
218,000 of securities received from the Pennsylvania Railroad 
during the year, and included in the above amount at their face 
valuation, the Pennsylvania Company received nothing during 
the year; and likewise nothing on the Oregon Short Line notes. 
Deducting these various amounts, the income of 1906 would 
represent about 5.7% on the book valuation of the balance, indi- 
cating that these securities are carried on the books at consider- 
ably under their market price. 

Character of Traffic. 

The Pennsylvania Company's passenger traffic for 1906 
amounted to only about 15% of its gross earnings; in other 
words, it is largely a freight line. Of the freight traffic about 
one-third is made up of bituminous coal alone, and coal and coke 
make up about 45%, a slightly lower proportion than on the 
Pennsylvania Railroad. Shipments of ores are large, so that mine 
products make up about 65% of the total. 

Stability of Earnings. 
With a small increase in mileage, the gross earnings of the 
Pennsylvania Company in ten years have increased enormously ; 



570 



PENNSYLVANIA COMPANY 



the earnings per mile having more than doubled within this 
period. The increase for 1905 was especially extraordinary, but 
was nearly equalled in 1906, as the following table reveals: 



Year 


Miles Operated 


Gross Earnings 


Earnings 
per Mile 


1896 


1,225 
1,225 
1,225 
1,225 
1,357 
1,396 
1,430 
1,526 
1,526 
1,389 
1,410 


$17,414,432 
18,615,700 
19,561,400 
22,986,827 
25,407,562 
29,054,545 
33,025,648 
36,602,935 
36,390,582 
40,596,439 
46,036,806 


$13,399 
15,195 
15,968 
18,601 
18,723 
20,812 


1897 


1898 


1899.. 


1900 


1901 


1902 


23,094 


1903 


23,986 
23,846 
29,232 
32,650 


1904 


1905 


1906 







Community of Interest Results. 

In 1899 the average freight earnings per ton mile were .51c. 
In 1905 they were .60c, an increase of nine-tenths of a mill. This 
on the company's total ton mileage represented a difference of 
$5,413,300 in the gross earnings of 1906. This was 11% of the 
gross earnings. The average net earnings for the same period 
increased by half a mill per ton mile, equivalent to v$3,000,000 of 
clear gain to the company. This is 33% of the total surplus in- 
come shown for the year. In other words, under the conditions 
of six years before, the company could pay 3% on its capital stock 
with rather less ease than it paid 6% in 1906. 



Maintenance. 

With this large increase of business the traffic density and main- 
tenance charges have likewise shown a heavy increase, as the 
following table shows : 





Traffic Density 


Maintenance per Mile 


Total 
per Mile 


Year 


Way 


Equipment 


1901 


2,713,100 
2,855,660 
2,897,684 
3,023,221 
3,724,795 
4,263,587 


$3,209 
3,056 
2,845 
2,518 
3,855 
4,402 


3,635 
3,975 
3,820 
4,619 
5,531 


$6,464 


1902 


6,691 


1903 


6,820 


1904 


6,338 


1905 


8,474 


1906 


9,933 






Average. . . . 


3,246,341 


$3,314 


$4,139 


$7,453 



Miles of extra main track, 815. 



PENNSYLVANIA COMPANY 



571 



Panhandle. . . 
Lake Shore . . 
Penn. R. R . . 



2,193,454 
3,102,376 
4,139,690 



2,567 
4,308 
3,752 




6,247 
8,401 
8,984 



It will be seen that in six years the traffic density increased 
about 60% and maintenance charges in almost the same proportion. 
Even allowing for the increased cost of materials and supplies, it 
will be seen that the standard of maintenance of 1906 was fully up 
to that of previous years ; and this standard has always been very 
high. There is little question that the maintenance charges of 
nearly $10,000 per mile in 1906 was so large that it might be very 
considerably curtailed in less prosperous times without injury to 
the property. It was nearly equal to the average maintenance of 
the Pennsylvania Railroad, while the traffic density of the latter is 
considerably higher and passenger business much greater. 

Improvements from Earnings. 

Even after these high maintenance charges, considerable sums 
have been set aside from surplus earnings for improvements, as 
follows : 

1900 $1,000,000 

1901 1,000,000 

1902 2,000,000 

1903 3,000,000 

1904 2,000,000 

1905 2,000,000 

1906 2,767,990 

Total $13,767,990 

The item for 1906 included $267,999 paid on account of princi- 
pal of car trusts, but similar payments in previous years are not 
shown. 

Surplus Earnings. 



After the liberal maintenance charges, but before charging off 
the special appropriations tabled above, funds available for divi- 
dends over a series of years have been as follows : 



572 



PENNSYLVANIA COMPANY 



Year 


Surplus 


Per cent 

Earned on 

Stock 


Dividends 
Paid 


Average 
Price 


1899 


$2,146,931 
2,119,603 
3,681,261 

5,783,984 
5,119,641 
5,187,930 
6,322,421 
8,933,888 


5.3 
5.2 
9.2 
14.4 
12.7 
12.9 
15.8 
14.9 


3 

3 
4 
5 
5 
6 




1900 


All 


1901 


owned 


1902 


by 


1903 

1904 


Pennsyl- 
vania 


1905 

1906 


Railroad 



The surplus shown for 1905 is the revised surplus given in 
the report of 1906, with the $267,990 car trust payments added. 
Previously this item has been included in the fixed charges. The 
percentage earned on the stock shown for 1905 is that calculated on 
the $40,000,000 of stock which was actually outstanding throughout 
the whole of the year, while the percentage for 1906 is calculated 
on the $60,000,000 of stock outstanding. 

It will be seen that the dividend payments were less than half 
of the surplus shown. 

Dividend Payments. 



Over a series of years the dividend have been as follows : 

1883 

1884-91 nil 

1892-4 • 4 

1895-00 nil 

1901-2 3 

1903 4 

1904-5 5 

1906 6 



The Balance Sheet. 

Excluding from current assets the item of materials on hand, 
according to the policy of this book, but including about $10,000,000 
due from leased and other companies for betterments and advances. 

Current Assets showed $41,330,711 

Current Liabilities 15,146,516 

Leaving a working balance of $26,184,195 



PENNSYLVANIA COMPANY 573 

This large balance includes, however, miscellaneous assets, 
nature not indicated, to the amount of $7,816,300. The various 
items of cash totaled $19,096,251 and the credit to balance of profit 
and loss at the close of the vear $7,839,743. 



The Pennsylvania's Equity. 

As the Pennsylvania Railroad owns the entire amount of the 
Pennsylvania Company's capital stock, the two companies are to 
all intents one. The debt of the one company to the other was, 
therefore, more or less a mere item of bookkeeping. 

Included in the subsidiary company's current assets was $13,- 
709,163 on deposit with the Pennsylvania Railroad, which sum 
would be of course deducted from the Pennsylvania Company's 
working balance in considering the parent company's interest 
therein. 

Even had it kept to a strict half-for-dividends-half-for-improve- 
ments policy, the Pennsylvania Company might have paid its parent 
7% during the year, or an additional $600,000; and unquestionably 
the Pennsylvania's interest in the equity represented by large im- 
provements and heavy maintenance charges is large. As has been 
shown, however, in the case of the Lake Shore, it would be absurd 
to consider that the entire amount of surplus earned would be readily 
available to the holding companies in case of need. Without doubt 
the maintenance charges on the Pennsylvania lines West could 
have been very materially lower in 1906 than they were, and this 
difference returned to the holding company in dividends. But it is 
the expectation of American roads that they shall not merely be 
maintained in equal condition from year to year, but that they shall 
be put in shape to meet the constantly expanding business — further, 
that a considerable part of these improvements shall be paid for 
from earnings. In view of all this, the estimate of enormous 
equities in the earnings of subsidiary lines which are sometimes 
figured for the Pennsylvania and similar holding companies are 
absurd. 

It is manifest that in its Lines West the Pennsylvania Railroad 
has properties of very rapidly increasing value, and that it could 
probably have drawn from the Pennsylvania Company's surplus 
earnings perhaps a million dollars more in the highly prosperous 
year of 1906 than it did, without curtailing the liberal standard of 
maintenance and improvements. 



PERE MARQUETTE RAILROAD. 

The Pere Marquette is notable as having been a part of the 
only large railroad system in the country to pass into the hands 
of a receiver in the highly prosperous period of 1900-1906. The 
company had been organized in 1899 for the purpose of consoli- 
dating the Flint & Pere Marquette, the Detroit, Grand Rapids & 
Western, and the Chicago & West Michigan Railway ; and two 
smaller roads were acquired or leased. 

In December, 1902, a syndicate, consisting of Thomas H. 
West and John F. Shepley of the St. Louis Union Trust Co., 
F. H. Prince of Boston, G. H. Norman, Newman Erb, Nathaniel 
Thayer, Mark T. Cox, B. P. Cheney, T. Jefferson Coolidge, 
Thomas F. Ryan and others acquired a controlling interest and 
F. H. Prince was made president. In 1903 the Lake Erie & 
Detroit River Railway, 226 miles, was taken over, and trackage 
rights secured over the Michigan Central into Buffalo, extending 
the line easterly from Detroit to the latter point. 

In 1904 the Cincinnati, Hamilton & Dayton secured control 
and leased the property, the Pere Marquette having previously 
acquired the entire stock of and leased a new line, the Chicago, 
Cincinnati & Louisville. The whole was to form what was to be 
known as the Great Central System. In December, 1905, Judson 
Harmon, of Cincinnati, was appointed receiver for the combined 
roads, and the Chicago, Cincinnati & Louisville returned to the 
vendors. The full story of the purchase and receivership is told 
under the heading of the Cincinnati, Hamilton & Dayton. 

In 1906 the Pere Marquette operated a total of 2,398 miles, 
lying mainly in the State of Michigan. 

The directorate for 1905, the year previous to the receiver- 
ship, included Eugene Zimmerman, then President of the Cincin- 
nati, Hamilton & Dayton; James N. Wallace, of the Central 
Trust Co., New York ; George W. Young, then President of the 
United States Mortgage & Trust Co. ; George M. Cumming, his 
successor; Richard N. Young, Arthur Turnbull, Alfred Skitt, 
Rudolph Kleybolte, of Kleybolte & Co., Bankers; W. R. Cross, 
Frederick L. Eldridge, of the Knickerbocker Trust Co.; Thomas 

(574) 



PERE MARQUETTE 575 

H. Tracy, W. C. MacMillan, then United States Senator from 
Michigan ; Wm. Alden Smith, later United States Senator from 
the same State, and Russell Harding, President of the Pere Mar- 
quette. 

The executive committee consisted of Eugene Zimmerman, 
James N. Wallace, F. L. Eldridge and Richard N. Young. The 
executive committee was the same as that of the C. H. & D. 
for that year, and the directorate largely the same. 

In 1906, after control of the road had passed to the Morgan 
interests, the directorate included George W. Perkins, of J. P. 
Morgan & Co., Chairman of the Board ; F. D. Underwood, Presi- 
dent of the Erie ; president Chas. Steele, of J. P. Morgan ; George 
F. Baker, president of the First National Bank; George W. 
Young, Norman B. Ream, J. G. McCullough, G. A. Richardson, 
W. R. Gross and E. H. Harriman, with three vacancies. 

In 1905 the road reported 1,984 shareholders. 

Capitalization. 

As of June 30th, 1906, the capital account of the road, not 
including the $3,500,000 collateral trust bonds, issued in purchase 
of the stock of the Chic, Gin. & Louisville, then in litigation, 
stood as follows : 

Common stock $16,000,000 

Preferred stock 12,000,000 

Total stock $28,000,000 

Funded debt (including leased lines, net) . . 49,993,292 

Equip, oblig. (including leased lines, net) . 4,708,000 

Receiver certif 1,619,180 

Total capital $84,320,472 

Rentals capitalized at 4% 19,170,000 

Approx. gross capital $103,490,472 

Securities held 6,142,414 

Approx. net capital $97,348,058 

Approx. net capital, per mile $40,595 

Average miles operated 2,398 

Net earnings on net capital 3.6% 

Stock on net capital 30% 

Fixed charges on total net income (estimated) 108% 



576 



PERE MARQUETTE 



In 1906 the Pere Marquette paid in rentals $766,849, which, 
capitalized after deducting securities held, left an estimated 
net capitalization of $40,495 per mile, on a road earning $5,600 
per mile. The net earnings for the year showed only 3.6% on 
the estimated net capitalization, a figure that is indicative of the 
high capitalization of the road. For the fiscal year of 1905 the 
road showed a deficit of $22,430, and for 1906 under the receiver- 
ship of $860,947. This was against a nominal surplus of $1,290,- 
549 for the fiscal year of 1904. The reasons for this appear in the 
following analysis of the charges for 

Maintenance. 

For six and a half years the comparison of traffic density 
and maintenance charges was as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900 


351,089 
430,380 
495,658 
512,647 
(487,388) 
551,421 
677,378 


$747 
863 
809 
586 

(538) 
720 
678 


$575 
564 
568 
494 

(493) 
650 
791 


$1,322 


1901 


1,427 


1902 


1,377 


1903 


1,080 


(1903-4) 

1904-5 

1905-6 


(1,031) 
1,370 
1,469 


Average. . . . 


503,096 


$733 


$607 


$1,340 


Lake Erie & W 

Wabash 

Gr. Rap. & In. 


592,307 
880,032 
501,035 


999 
1,332 
1,110 


733 
1,370 

983 


1,732 
2,702 
2,093 



It will be seen from the above that in the fiscal year of 
1904 maintenance of way amounted to only $538 and equipment 
to $493, a total of $1,031, on a road with a freight traffic density 
of about 500,000 ton miles. The total maintenance for the previ- 
ous year was only $1,080. It will be seen from the table above 
that the average maintenance of the Lake Erie & Western for a 
period of six years was about $700 per mile higher than that of 
the Pere Marquette for these two years, and that of the Grand 
Rapids & Indiana, $1,000 per mile, respectively 70% and 100% 
higher, on roads with something like the same traffic density. It is 
safe to say that the undercharge for the two years under view was 
at least from $400 to $500 per mile, and this on the average mileage 
operated would have been sufficient to wipe out the larger part of 
the nominal surplus shown. 



PERE MARQUETTE 



577 



As further indication of the condition of the road, it is to be 
noted that in 1905, with an increase in gross earnings of $1,236,- 
728, there was an increase in the cost of conducting transporta- 
tion of $1,040,000, indicating that the costs of operation in the 
previous year had been cut to the bone. Operating expenses 
in 1905 showed a total increase of $2,198,973 over 1904, with the 
result noted that with a fair increase in earnings the operation 
showed a deficit for the year. 

Surplus and Earnings. 

From the organization of the road, earnings have shown as 
follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1900 


1,821 
1,838 
1,828 
2,109 
2,171 
2,380 
2,398 


$ 8,296,111 
9,201,175 
9,955,375 
11,356,436 
11,430,691 
12,667,420 
13,430,169 


$4,555 


1901 


5,003 


1902 


5,445 


1903 


5,385 


1904-5* 

1905-6 


5,264 
5,322 


1906 


5,599 







In the same period the surplus shown was as follows : 

1900 $646,189 

1901 734,575 

1902 993,137 

1903 1,616,678 

1903-4 1,290,549 

1904-5 Deficit 22,430 

1905-6 Deficit 860,947 

The 4% on the preferred stock was paid up to and including 
1905. The dividends for the latter year were paid out of the 
profit and loss account, and helped to swell the loss which that 
account showed, as below. 



The Balance Sheet. 

The balance sheet for June 30th, 1905, just previous to the 
purchase of the road by the Morgan interests and the subsequent 
receivership, showed as follows : 

37 



578 PERE MARQUETTE 

Current assets $2,676,203 

Deferred assets 683,287 

Total assets $3,359,490 

Current liabilities $4,456,857 

Deferred liabilities 1,032,^36 

Total liabilities $5,489,793 

Leaving a debit balance of $2,130,303 

The item of cash on hand was $299,938 and the profit and loss 
account showed a debit balance of $504,498. 

On June 30th, 1906, the balance sheet showed : 

Current assets $2,777,038 

Deferred assets. 218,921 

Total assets $2,995,959 

Current liabilities $4,495,856 

Deferred liabilities. 1,510,094 

Total liabilities $6,005,950 

Leaving a debit balance of $3,009,991 

There was cash on hand of $599,075 and the balance to 
debit of profit and loss had grown to $1,495,490. 

There had been issued under the receivership receiver certi- 
ficates to the amount of $1,619,180. Of this $1,200,000 was 
issued partly for payment of back taxes of the Pere Marquette 
Railroad, levied by the State of Michigan, and for a long time 
in litigation. 

Condition. 

For the fiscal year of 1906, of which seven months had been 
under the receivership of Judson Harmon, the company showed 
on practically the same operated mileage an increase of $762,- 
749 in gross earnings and $745,432 increase in net earnings. In 
other words, practically all of the increase in gross was saved 
to net earnings. Operating expenses, therefore, decreased from 
78.3% in 1905 to 74% in 1906. 



PERE MARQUETTE. 579 

Analysis of the operating expenses shows that, while main- 
tenance charges increased, the cost of conducting transportation 
decreased $280,000. This was in face of an increase in freight 
carried of 310,000,000 ton miles, or about 22%, and in the face, 
likewise, of a decline in the average rate per mile from .69c. to .60c. 

Revenue freight per train mile increased from 251 to 311 
tons, and the average haul from 157 to 171 miles. The increase 
of freight earnings per train mile was from $1.73 to $1.85. 

During the year 96 miles of new 85-lb. steel rail was laid, 
69 miles of sidings and yard tracks were built, and, during the 
year, a contract was entered into with the Canadian Pacific for 
joint terminal facilities at Windsor, Ont., providing for a good 
and independent crossing of the Detroit River, between Detroit 
and Windsor, Ontario. Additions and improvements for the 
year amounted to $750,908, and 50 new locomotives, 150 freight 
cars, 41 passenger cars, and 53 work cars were added to the 
equipment of the road. 

This was a very remarkable showing and revealed the 
splendid management of the road under Receiver Harmon's 
hands. Had it not been for an increase of $782,000 in taxes, 
the larger part of which was back taxes, $316,000 in added in- 
terest charges, and of $205,000 in added rentals, a total of $1,303,000, 
the road would have earned a surplus of nearly half a million 
dollars. As back taxes in excess of this latter sum were paid 
during the year and charged against income, it is evident 
the property for the fiscal year of 1906 just about earned its 
fixed charges, even with the considerable increase in taxes under 
the Michigan law, the constitutionality of which has now been 
confirmed. 

It is evident, therefore, that if the floating debt could have 
been funded at a low rate of interest, the road might have been 
taken out of the hands of the receiver, and had it not been for 
the condition of the money market through the fiscal years of 
1906-7 this undoubtedly would have been done. 



PEORIA AND EASTERN RAILWAY. 

The Peoria & Eastern operates 352 miles eastward from Peoria 
through Indianapolis to Springfield, Ohio. It is a subsidiary of 
the Big Four, which owns a majority of the stock, and is therefore 
a part of the Vanderbilt system. The Board of Directors is con- 
trolled in the Vanderbilt interest. As of January 1st, 1907, the 
principal items of interest were as follows : 

Capital Stock $10,000,000 

Funded Debt 131,985,100 

Total $23,985,100 

Gross Earnings for 1906 3,059,281 

Per Mile 8,691 

Operating- Ratio 68% 

Nominal Surplus $172,800 

For a number of years operating expenses have been consider- 
ably surcharged. In 1906 on a freight traffic density of 1,044,860 
ton-miles the maintenance charges were, for way and structures, 
$1,123 per mile, and for maintenance of equipment, $1,214. This 
was a slight reduction from the previous year. 

If the amount charged to operating expenses for new con- 
struction, etc., be added to the nominal surplus shown, the com- 
pany earned about 3% on its capital stock. No dividends have 
been paid for a number of years. 

The Big Four guarantees the interest on the company's bonds, 
except the income bonds. The road is a one-quarter owner of the 
Peoria & Pekin Union Railroad. 



(580) 



PHILADELPHIA AND ERIE RAILROAD. 

The Philadelphia & Erie consists of a line from Sunbury, Penn- 
sylvania, northwesterly to Erie, operating 307 miles in all, with 157 
miles of double track. This road was leased to the Pennsylvania 
Railroad for 999 years, actual net receipts being paid as rentals. 

As of January 1st, 1907, the principal items of interest were: 

Common stock $7,985,000 

Special Guaranteed stock 2,400,000 

Total $10,385,000 

Funded Debt 19,823,000 

Total $30,208,000 

Gross Earnings ( 1906) 8,342,875 

Net Earnings 2,169,635 

Per cent, on capital 7.0% 

Surplus 973,484 

The surplus of 1906, after payment of 7% on the special guar- 
anteed stock was equivalent to 10% on the common stock. The 
surplus of 1905 was $1,255,630. In 1906 the common stock fluctu- 
ated between $64 and $73 per $50 share. 

As of January 1st, 1907, the Pennsylvania Railroad owned all 
of the $2,400,000 special stock, $3,499,800 or nearly one-half of 
the common stock and $3,944,000 of the general mortgage bonds. 

In January, 1907, the Pennsylvania Railroad offered to ex- 
change the balance of the outstanding common stock dollar for 
dollar for Pennsylvania Railroad stock, and the offer to merge the 
line with the Pennsylvania Railroad Company was ratified by the 
shareholders. 

Six per cent, was paid on the common stock in 1906 and in 
1905 ; 4% in the three preceding years. It is obvious that as the 
dividend on the Pennsylvania stock was raised to 7% in 1906, this 
offer was highly advantageous to the shareholders of the Phila- 

(581) 



582 PHILADELPHIA & ERIE 

delphia & Erie. The earnings of the Pennsylvania are naturally 
more stable than those of the smaller road and the percentage 
shown by the Pennsylvania on its common stock for 1906 was 
higher than that shown by the Philadelphia & Erie, after liberal 
maintenance charges. On the other hand, it was evident from the 
earnings of the road that this offer on the part of the Pennsylvania 
was amply justified. 



PHILADELPHIA, BALTIMORE AND WASHING- 
TON RAILROAD. 

The Pennsylvania lines from Philadelphia to Washington 
are owned and operated by a subsidiary company known as 
above. The latter was a consolidation in 1902 of the old Philadel- 
phia, Wilmington and Baltimore, and the Baltimore and Poto- 
mac. The Pennsylvania owns practically all of its capital stock, 
and the road is therefore of interest here, more especially for the 
equity which the Pennsylvania has in its surplus. 

The capitalization of the road Jan. 1, 1907, stood as follows: 

Common stock . $23,493,575 

Funded debt 20,200,973 

Nom'inal capital $43,694,548 

Rentals cap. at 4% 21,965,325 

Approximate gross capitalization $65,659,873 

Securities held 8,010,770 

Approx. net capitalization $57,649,103 

Approx. net capital, per mile $81,655 

Average operated mileage 706 

Net earnings on net capital 7.5% 

Stock on net capitalization 41% 

Fixed charges on total net income 45% 

Factor of safety 55% 

The gross earning for 1906 were $15,941,241. Passenger 
earnings nearly equalled freight earnings. 

The maintenance of way averaged $2,681 per mile and main- 
tenance of equipment $3,661 per mile, or a total of $6,342 per 
mile, a considerable increase over 1905. This on a traffic density 
of 1,125,965 ton-miles was apparently very heavy maintenance, 

(583) 



584 PHILADELPHIA, BALTIMORE & WASHINGTON 

but the high proportion of passenger earnings, nearly 50%, 
makes the comparison deceptive. It was obviously, however, 
fully up to the Pennsylvania's tradition. 

Net earnings showed 7.5% on the estimated net capital, or 
slightly under the figure of 8.1% for the Pennsylvania Railroad. 

The surplus for 1906 was $2,782,552, a slight increase over 
the previous year. This was equivalent to 11.8% for the out- 
standing stock or about the same figure as shown by the Penn- 
sylvania Railroad. 

Four per cent, was paid on the common stock and the bal- 
ance of the surplus, $1,842,810, turned back into improvements 
of the road. It is obvious from this that 6% might readily have 
been paid, which would have added $470,000 to the Pennsyl- 
vania's other income. 

As of January 1st, 1907, stocks and bonds were carried on 
the books at a valuation of $8,010,770. The principal items of 
these holdings were 

Baltimore & Ohio, common $1,048,700 

" pfd 1,000,000 

The balance was chiefly in subsidiary roads. 

Current liabilities about equalled current assets but there 
was in addition an item of accounts payable of $5,063,826 requir- 
ing funding or payment in some form. 



PITTSBURGH AND LAKE ERIE RAILROAD. 

The Pittsburgh & Lake Erie is the most extraordinary road 
of any considerable dimensions in the United States, or for that 
matter in the world. Its traffic density is the heaviest, its gross 
earnings the largest, per mile of road, known. Its net capitali- 
zation exceeds $100,000 per mile, and yet it earns on this, 34% 
per annum. 

Its traffic density for 1906 was nearly 10,000,000 ton miles 
per mile of road operated, against 2,226,046 for the New York 
Central, and 4,742,081 for the Pennsylvania. Its gross earnings 
for the year of $75,000 per mile compared with $24,336 for 
the New York Central and $37,661 per mile for the Pennsylvania. 

It has more miles of extra track than main line, which is true 
of no other considerable road in the country. It has a locomotive 
for more than every mile of road operated ; it has only 91 pas- 
senger coaches, but over 12,000 coal and coke cars. And this is 
all that it is, — simply a coal and coke hauling road. But on its 
capital stock it practically earned a surplus in 1906 of nearly 75%, 
a figure which stands against the extraordinary figure of 43.4% 
similarly estimated for the Delaware & Lackawanna. The New 
York Central earned only 8%, and the Pennsylvania only, 11.6%. 

The road was opened in 1879, the main line extending from 
Pittsburgh to Youngstown, Ohio, where it connects with the Lake 
Shore. It operates a total of 191 miles, with 210 miles of second, 
third and fourth track. The road is a part of the New York Cen- 
tral system and $5,000,100 of its $10,000,000 capitalization is owned 
by the Lake Shore. The directorate of 1906 comprised six of the 
New York Central-Lake Shore directors, with James M. Schoon- 
maker, vice-president and general manager ; the other directors 
were John G. Robinson, M. W. Watson, D. Leet Wilson, J. B. 
Jackson and George E. Shaw. 

Capitalization. 

The capitalization of the road on January 1st, 1907, was as 
follows : 

(585) 



586 PITTSBURGH & LAKE ERIE 

Common stock $10,000,000 

Funded debt 4,000,000 

Total Capital $14,000,000 

Rents capitalized at 4% 12,054,425 

Approx. gross capitalization $26,054,425 

Securities held 5,065,224 

Approx. net capitalization $20,989,201 

Approx. net capit. per mile $109,891 

Average miles operated 191 

Net earnings on net capital 34.3% 

Stock on net capitalization 47% 

Fixed charges on total net income 1 1 % 

Factor of Safety. . ,. 89% 



1 



The nominal net earnings represented about 15% on the esti- 
mated net capitalization, but in the operating expenses extraordin- 
ary expenditures to the amount of $4,932,000 were included. If this 
sum be added to the nominal net earnings, the actual earnings of 
the road represented 34.3% on the estimated net capitalization. 

The road paid in 1906, $481,616 of rentals on leased lines. 
This amount capitalized at 4%, adds $12,054,425 to its nominal 
capital. The stock represents 47% of the estimated net capital. 

Fixed Charges consumed 27% of the nominal net income, but 
if new construction and new equipment were eliminated from the 
charges for operation, Fixed Charges would then have represented 
only 11% of the total net income. In any event its Factor of Safety 
for the underlying securities of the road is very high, amounting 
even on the former estimate to 73%. It is in reality considerably 
higher. The company's holdings in other lines are very slight and 
it has no equities worth mentioning. 

Character and Stability of Traffic. 

Less than 10% of the gross earnings of the road are derived 
from passenger earnings, and more than 90% come directly from 
freight traffic. Of the freight traffic, bituminous coal makes up 
about 45%, and coal and coke together 60%. Iron and manuf acq- 
uires make up 15%. 



PITTSBURGH & LAKE ERIE 



587 



While the mileage has increased but slightly, gross earnings 
have increased enormously, rising from four and a half million 
dollars in 1896 to $14,481,495 in 1906. The great rise came be- 
tween 1899 and 1902, the traffic of the road being doubled in four 
years. The increase for 1905 amounted to more than 25%, and for 
1906 to 12%. 

The freight rates of the road are comparatively high, averag- 
ing .68c. per ton-mile in 1906. This was a considerable increase 
over 1899 when the average earnings were only .57 cents. The in- 
crease amounted to 20%. The difference would represent on the 
1,896,158,559 tons carried one mile in 1906, a difference of over two 
million dollars in the gross earnings of the road. With the com- 
munity of interest idea, and in the prosperity of the bituminous coal 
industry, the interests of the road are very closely bound up. 

Maintenance. 

Details of traffic density and maintenance over a series of years 
are shown in the following table : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900 


5,582,270 
5,857,688 
7,494,003 
7,622,328 
6,811,229 
8,568,288 
9,927,531 


$11,044 
14,948 
15,455 
15,296 
13,329 
19,260 
19,236 


$7,101 
5,835 
8,604 
12,442 
12,539 
16,659 
20,348 


$18,145 


1901 


20,783 


1902 


24,059 


1903 


27,738 


1904 


25,868 


1905 


35,919 


1906 


39,584 







As with the other Vanderbilt lines, a change was made in the 
accounting methods in 1905 and separate items entered for new 
construction and new equipment, previously lumped in with ex- 
penses of operation. These items have been included in the table 
above in order to preserve its comparative value. Actually, for 
1906, maintenance of way amounted to $7,144 per mile and the 
maintenance of equipment to $6,611 per mile, or a total of $13,755 
per mile. When the $4,933,000, expended for new construction and 
new equipment, was added in, the total was as shown in the table 
above. 

Taking the figures as a whole, it will be seen that this road 
in 1905 and again in 1906 spent more in maintenance and improve- 
ments per mile than most of the American roads have cost per mile 
to build and equip, and more than the actual gross mileage capitaliza- 



588 PITTSBURGH & LAKE ERIE 

tion of such roads as the Chicago & Northwestern, the Burlington, 
the St Paul, the Canadian Pacific, etc. For a series of years these 
enormous surcharges have formed part of the systematic policy of 
the road. 

The nominal surplus earnings in 1906 amounted to $2,485,021, 
as against $2,142,000 in 1905 and $1,472,000 for the year preceding. 
This was 24.8% on the capital stock as against 21.4% in 1905, and 
14.2% in 1904. 

But if to the nominal surplus were added the sums spent for 
new equipment, and new construction, the actual surplus would 
have been 38% in 1904, 64.5% in 1905, and 74.8% in 1906. This 
latter figure stands against a similar estimate of 23.1% for the Lake 
Shore. 

The road paid 6% dividends from 1884 to 1891; 8% in 1892; 
10% annually to 1906, and 11% in 1906. Should the present earnings 
continue, undoubtedly extra dividends will be declared. If the Lake 
Shore pays 10%, with actual earnings in the neighborhood of 23%, 
and is worth $300 a share ; it is fair to assume that the Pittsburgh 
and Lake Erie, paying 11% and on a similar basis earning 74%, 
should be worth considerably more. The stock is not listed on any 
exchange, and practically none of it is on the market. Probably 
there are very few holders who would part with their stock under 
present conditions at less than $400 a share, and while on this 
basis the present dividend would yield only about 2^%, yet the 
undistributed surplus of 1906, amounting even after deducting 
extraordinary improvements to 13.8% over the 11% paid, is so 
large as readily to justify such a price, or perhaps a still higher 
figure. Dividing the actual surplus for 1906 half and half, the 
road might have paid a 30% or 35% dividend as easily as the 
Lackawanna paid 20%. 



PITTSBURGH, CINCINNATI, CHICAGO AND 
ST. LOUIS RAILWAY. 

(The Panhandle.) 

The Pittsburgh, Cincinnati, Chicago and St. Louis Railway, 
familiarly known as the Panhandle, is one of the subsidiary lines 
of the Pennsylvania Company. It operates a line more or less 
parallelling the Pennsylvania's own line from Pittsburgh to Chi- 
cago, reaching also to Cincinnati and to Louisville. It forms a 
sort of middle link in the Pennsylvania system, with the Vandalia 
for St. Louis and Illinois points and with the Grand Rapids and 
Indiana for Michigan points. 

The road represents the consolidation in 1890 of the Pittsburgh, 
Cincinnati and St. Louis ; the Chicago, St. Louis and Pittsburgh ; 
the Cincinnati and Richmond, and the Jeffersonville, Madison and 
Indianapolis railroads. It controls by lease the Little Miami, 194 
miles, and its owns the entire capital stock, $2,000,000, of the Cin- 
cinnati and Muskingum Valley Railroad. It owns a one-third 
interest in the control of the Hocking Valley, that is, $2,308,200 par 
value of the common stock. 

Ownership. 

The Pennsylvania Company owns $22,470,000 par value of the 
preferred stock (81%) of the Panhandle, and $14,587,000 par value 
of the common stock, or a large majority interest. The directors 
and executive officers of the Panhandle are practically the same 
as those of the Pennsylvania Company. 

Capitalization. 

The capital account on January 1st, 1907, stood as follows : 

Common stock $25,226,769 

Preferred stock 27,563,922 

Total $52,790,691 

Funded Debt 50,921,000 

Coll. Oblig 2,500,000 

Car Trusts 10,093,795 

Total Capital $1 16,305,486 

(589) 



590 PITTSBURGH, CINCINNATI, CHICAGO & ST. LOUIS 
Rentals capitalized at 4% 34,050,000 

Approx. gross capitalization $150,355,486 

Securities held 5,571,930 

Approx. net capitalization $144,783,556 

Approx. net capit. per mile $101,311 

Aver, miles operated 1,429 

Net earnings on net capital 6.6% 

Stock on net capitalization 31% 

Fixed charges on total net income .... 54% 

Factor of Safety 46% 

The estimated net capitalization per mile of the Panhandle, 
$101,311, compares with a similar estimate of $177,354 for the 
Pennsylvania Company, $78,987 for the Lake Shore, $69,150 for the 
Wabash, and $58,374 for the Big Four, all contiguous roads. The 
net earnings represent 6.6% of the estimated net capitalization, as 
compared with 5.8% for the Pennsylvania Company, 5.3% for the 
Big Four, and 12.7% for the Lake Shore. In other words, its 
capitalization on the basis of earnings is about the same as that 
of the Pennsylvania Company and the Big Four, but very high as 
compared with the Lake Shore. 

Aside from its holdings in the Hocking Valley Railroad, the 
Panhandle has no considerable equities in other roads. 

The stocks represent about two-fifths of the estimated net 
capitalization, as against about one quarter for the Pennsylvania 
Company. Fixed Charges in 1906 consumed a little more than 
half of the total net income, leaving an ample Factor of Safety for 
the underlying securities, guaranties, etc. 



Increase of Capitalization. 

The increase of capitalization over six years was as follows 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1900 
1906 


$25,210,721 
25,226,769 


$22,700,793 
27,563,922 


$46,515,000 
53,421,000 


$94,426,514 
106,211,691 


$22,264,923 
34,485,500 



Net increase over six years: Nominal Capital, 11%; Gross Earnings, 54%. 



PITTSBURGH, CINCINNATI, CHICAGO & ST. LOUIS 591 

Character of Traffic. 

Products of mines make up 54% of the total freight tonnage, 
and of this two-thirds was due to bituminous coal. Manufactures 
make up 26% ; farm products a little less than 9%. 



Stability of Earnings. 

In ten years the gross earnings have doubled, while the mileage 
has but very little increased. The gross earnings per mile rose from 
$11,930 in 1896 to $24,133 in 1906. That this increase has been 
steady and continuous, showing practically no setback from one 
year to the other, the following detail shows : 



Year 


Miles Operated 


Gross Earnings 


Earnings 
per Mile 


1896 


1,403 
1,403 
1,403 
1,403 
1,407 
1,407 
1,416 
1,418 
1,423 
1,427 
1,429 


$16,738,812 
17,683,947 
18,942,651 
21,196,817 
22,264,924 
24,290,892 
26,634,358 
28,960,821 
28,532,475 
31,417,095 
34,485,500 


$11,930 


1897 


12,176 


1898 


13,501 


1899 


15,108 


1900 


15,824 


1901 


17,264 


1902 


18,809 


1903 


18,783 


1904 


20,050 


1905 


21,863 


1906 


24,133 







Under the Community of Interest arrangement, the average 
earnings per freight ton-mile increased from .55 cents in 1899 to 
.65 cents in 1906, or one mill per ton. This, on the 3,844,000,000 tons 
carried one mile would represent a difference of about $3,800,000 
on the gross earnings for 1906. Average earnings per freight ton- 
mile increased only from .13 cents to .16 cents, so that comparatively 
little of this increase in rate resulted in net profit to the road. Still 
it meant a difference of over $1,000,000 in the net freight earnings 
of the road for 1906. 

Maintenance. 

The traffic density of the road is rather heavy, 2,690,091 ton- 
miles per mile of road operated in 1906. Its maintenance charges 
were very heavy, amounting to $7,944 per mile in 1906. 

The company had in 1906 457 miles of additional main track, 
or about 35%. The details of the traffic density and maintenance 
follow : 



592 PITTSBURGH, CINCINNATI, CHICAGO & ST. LOUIS 



Year 


Traffic Density 


Maintenance per Mile 


Total 
per Mile 


Way 


Equipment 


1901 


1,939,173 
2,019,448 
2,088,097 
1,983,768 
2,440,148 
2,690,091 


$2,197 
2,460 
2,500 
2,292 
2,735 
3,222 


$3,026 
2,504 
4,016 
3,638 
4,175 
4,722 


$5,223 


1902 


4,964 


1903 


6,516 


1904 


5,930 


1905 


6,910 


1906 


7,944 






Average. . . . 


2,193,454 


$2,567 


$3,680 


$6,247 


Erie 


2,366,817 
3,102,376 
3,246,341 


1,845 
4,308 
3,314 


2,890 
4,093 
4,139 


4,735 


Lake Shore . . . 
Penn. Co 


8,401 
7,453 



Improvements. 

From the surplus earnings the following sums have been set 
aside for improvements : 

1900 $690,601 

1901 1,419,756 

1902.. 808,661 

1903 347,351 

1904 690,058 

1905 1,000,000 

1906 900,000 



Total $5,856,427 

Surplus Earnings. 

In the face of a very heavy increase in maintenance charges 
(from $5,223 to $7,944 per mile), the surplus earnings increased 
from $2,382,351 in 1900 to $4,517,586 in 1906. The preferred 
stock is entitled to 5% dividends after 3% has been paid on the 
common, but in the following table the percentage earned on the 
common is the per cent, of surplus shown for the common after 
the preferred dividend is actually paid. 







Dividends 


Per cent. 


Dividends 


Average 


Year 


Surplus 


on Preferred 


Earned on 


Paid on 


Price 






Stock 


Common 


Common 


Common 


1900 


$2,382,351 


4 


5.9 


— 


68 


1901 


3,696,992 


4 


11.3 


1% 


64 


1902 


2,249,309 


4 


5.3 


3 


83 


1903 .... 


2,425,741 


4 


5.2 


3 


71 


1904 


2,920 238 


4 


7.3 


3 


65 


1905 


4,080,311 


4 


11.8 


3 


70 


1906 . . 


4,517,586 


5 


12.4 


3* 


81 



PITTSBURGH, CINCINNATI, CHICAGO & ST. LOUIS 593 

In 1906 a change was made in the method of accounting, 
whereby the principal paid on car trusts was separated from the 
interest thereon, and charged in after surplus, instead of being 
included in fixed charges as heretofore. In order to make the com- 
parison with 1906, the amount so paid in 1905 ($506,112) has been 
added in the above table to the nominal surplus shown in 1905, but 
has not been so added in the previous years. This accounts for 
the sudden increase of surplus shown from 1904 to 1905 and 1906. 

Dividend Record. 

The dividend record for a series of years is as follows : 

Preferred. Common. 

Year. % % 



1891 

1892-93 


1 
4 


1901 

1902-6 

1906 




1894 


2 




1895 

1896 

1897-8 


nil. 
2 
nil. 




1899 

1900-1905 


3 
4 


1 

3 yearly 


1906 


5 


3^ 



The Balance Sheet. 

Excluding material on hand, according to the custom adopted 
in this book, the balance sheet, December 31st, 1906, showed: 

Current Assets $6,241,567 

Current Liabilities 10,074,700 



Leaving a debit balance of $3,833,133 

Included in the current liabilities shown above, was $4,250,000 
due to the Pennsylvania Company for advances on construction, 
and this amount due to the holding company might legitimately be 
deducted from the current liabilities shown above. The item of 
cash amounted to $1,619,960 and the balance to credit of profit and 
loss was $3,826,488. 

The company paid into the sinking fund during the year of 
1906, $449,990, and $596,133 as principal on car trusts, both of 
which items were charged against income. 

38 



594 PITTSBURGH, CINCINNATI, CHICAGO' & ST. LOUIS 

Investment Value. 

The preferred stock is entitled to 4% dividends and after 3% 
has been paid on the common, to an additional 1%, and after 
5% has been paid on the common both classes share alike. 

Since the advent of the Cassatt administration in 1900, 4% 
has been paid continuously on the preferred. In 1906 the stock 
was put on a 5% basis. It sold as low as $90 per share in 1903-4, 
rising to $112 in 1905 and $109 in 1906. 

Inasmuch as a handsome surplus had been earned on the 
common, the preferred may be regarded as a fairly solid 5% stock, 
entitled to sell, with time money at 4%, at from $100 to $125 per 
share, — or' better, in view of the proviso by which the stock may 
receive dividends additional to 5%, when that amount has been paid 
on the common also. 

Including the amounts paid on car trusts as a part of the 
surplus income, the common in 1906 showed 12.4% after payment 
of the full 5% dividend on the preferred. 3% annually has been 
paid on this stock from 1902, and in 1906 the stock was put on a 
4% basis. This dividend was amply earned and should the hand- 
some increase of earnings which the road has shown in previous 
years continue, the stock might readily be placed on a 5% basis. 
The stock sold as high as $105 per share in 1902, declining to $55 
per share in 1903, rising again to $87 per share in 1906 and declin- 
ing to $67 in March of 1907. 

As a fairly solid 4% stock, with prospects of an increase to 
5%, the stock might reasonably sell, with money at 4%, well 
towards par and if bought, therefore, at anything like the low 
levels of 1907 or 1903, it should show in time a satisfactory profit 
to its purchaser. 



READING COMPANY. 

The greatest of the great "Coalers," having larger holdings in 
the anthracite coal fields than all of the other prominent coal roads 
put together, with a stormy past, and undoubtedly a great future, 
the "Reading," as it is known, is one of the most notable of Ameri- 
can railways, outside of the great trunk lines. 

Although it operates directly only a thousand miles of road, it 
controls by stock interests and otherwise more than a thousand 
more. On its own lines its gross earnings amount to nearly forty 
millions of dollars. It has a majority interest in the Central Rail- 
road of New Jersey ; and the operations of the company include one 
of the largest coal properties in the world. Since the anthracite 
coal fields are limited, it is probable that these holdings will steadily 
increase in value, and already their estimated valuation is sufficient 
to wipe out a large part of the indebtedness of the road, leaving 
the railroad properties and all its stock holdings to the shareholders 
free of charges. 

History. 

The Reading was originally projected simply to carry coal 
from the anthracite coal basins in Schuylkill County, to tidewater 
at Philadelphia. From this slender beginning, it was able to build up 
so that in 1892-3, it formed a system owning or controlling over 
8,000 miles of track. This was under the famous McLeod manage- 
ment, which came to so disastrous an end in the general toppling 
of financial edifices in 1893. It had then leased the Lehigh Valley, 
obtained control of the Delaware and Lackawanna, and the McLeod 
management had also gained the upper hand in the Boston and 
Maine, and the New York and New England railroads. The 
combination was one of. the most spectacular that had been formed 
up to that time, and at the close of 1892, Mr. Van Oss, writing in 
his "American Railroads," said that "it is certain that though a 
few years must elapse before we shall be in a position to gauge their 
full bearing, we are justified in expecting wondrous results." 

The "wondrous results" were never realized, the lease of the 

(595) 



596 READING 

Lehigh was broken, and out of the wreck of this monstrous combi- 
nation, the present Reading Company was formed. It took over the 
old Philadelphia and Reading Railroad and the Philadelphia and 
Reading Coal and Iron Company, the reorganization being effected 
in 1896. The new company did not speedily prosper, but in 1901 
the property came under the directing genius of George F. Baer, 
who, despite temperamental peculiarities, has brought the road to a 
high point of efficiency and prosperity. 

The mileage of the company carries the road from its central 
point, Philadelphia, through Reading, up to a perfect network of 
railways in the anthracite regions, while other branches lead to 
Port Reading, opposite Staten Island, N. Y., and southward from 
Philadelphia to Atlantic City and Cape May. The Wilmington and 
Northern, and the Perkiomen and other small roads are also in- 
cluded as a part of the system. Naturally the road operates in close 
conjunction with its subsidiary line, the Central R. R. of New Jersey. 

Ownership. 

At the beginning of 1903 it was announced that the Baltimore 
and Ohio and the Lake Shore had jointly purchased control of the 
road. At the last reports the Baltimore and Ohio owned $6,065,000 
of the first preferred, $14,265,000 of the second preferred, and 
$10,002,500 of the common stock; and the Lake Shore a similar 
amount of each issue. This gives a total of over $60,000,000 of 
the $140,000,000 of the capital stock of the company, and this with 
the private holdings of associated interests, assures absolute con- 
trol. Morgan interests have long been identified with the fortunes 
of the Reading, and exercise a potent voice in its affairs. The stock 
is closely held, despite the enormous tradings which have been 
carried on in the stock exchange. 

The directorate of the road includes H. McK. Twombly, repre- 
senting the Vanderbilt interest; Charles Steele, representing the 
Morgan interests; George F. Baer, president of the Reading and 
likewise of the Central of New Jersey, and a director in the Le- 
high Valley; Henry A. Dupont, president and general manager of 
the subsidiary Wilmington and Northern; Joseph S. Harris, capi- 
talist, president of the Jerome Silver-Copper Mines; Edward T. 
Stotesbury, also a director in the Lehigh Valley, the Cambria and 
Pennsylvania Steel companies, and similar corporations; Henry C. 
Frick, also a director in the Norfolk and Western, the Union Pa- 
cific, the Chicago & North Western and other roads, and understood 



READING 597 

to be one of the heavy stockholders of the Reading; Henry P. Mc- 
Kean, and Samuel Dickson. 

The directors of the subsidiary companies, the Philadelphia 
and Reading Railway, and the Philadelphia and Reading Coal and 
Iron Company, are practically the same ; and the three companies 
are managed as a coherent whole. 

Capitalization. 

Organized into three separate companies, with practically 
identical officers, the accounts of the Reading and its two subsidi- 
aries present an intricate and confusing scheme of interlacing ac- 
counts which tend to make analysis difficult and somewhat arbitrary. 

The ''Reading Company" owns the entire capital stock of the 
Philidelphia and Reading Railroad, and the Philadelphia and Read- 
ing Coal and Iron Company, as well as large amounts of their 
bonds and a large item of debt from the coal company. In the fol- 
lowing scheme the stocks and bonds of the two subsidiary com- 
panies held by the Reading Company have been included among the 
items of securities held, together with the $79,000,000 of the coal 
company's debt. They have not been otherwise included in the 
estimate of capitalization; on the other hand, all of the stocks and 
bonds of the two subsidiary companies held by the public are com- 
prised in the following statement, which is the estimated capital- 
ization of the Reading Company. 

Common stock $70,000,000 

First Preferred 28,000,000 

Second Preferred 42,000,000 

Total stock $140,000,000 

Funded Debt, Reading Co 100,978,372 

" equip 4,242,000 

" P. & R. (net) 50,339,521 

P. & R. Coal & I. Co. Loan 1,290,000 

Total capital. $296,849,893 

Rentals capit. at 4% 76,525,000 

Approx. gross capital $373,374,893 

Securities held by all Cos 211,732,736 

Approx. net capital $161,642,157 



598 READING 

Approx. net cap. per mile $161,642 

Average miles operated 1,000 

Net earnings on net capitalization. ..... 10.8% 

Stock on net capitalization 86% 

Fixed Charges (net) on total net income 45% 

Factor of Safety 55% 

Of the total funded debt of the Philadelphia and Reading Rail- 
way Company, twenty millions of dollars of Purchase bonds are 
held by the Reading Company, which item is deducted, leaving a 
net funded debt of the Railway as stated. 

The rentals paid amounted in 1906 to $3,061,000, a considerable 
part of which returns to the treasury of the Reading company 
through its ownership of the stocks and bonds of these leased lines. 

It will be seen that even deducting the huge amount of securi- 
ties owned, the estimated net capitalization for a thousand miles of 
road is high. It compares with an estimated net capitalization of 
$145,566 for the Pennsylvania, and of $132,789 for the Lackawanna. 

Yet, even with this high estimated capitalization, the net earn- 
ings of the road show a high percentage. The net earnings here 
taken are simply the net earnings of the Philadelphia and Reading 
Railway, and are exclusive of the items of Other Income alike of the 
Railway Company and of the parent Reading Company. Even 
on this basis, the net earnings show 10.8% on the estimated net 
capitalization, as against similar estimates of 8.1% for the Pennsyl- 
vania and 13.7% for the Lackawanna. 

It will be seen further that the securities held nearly equal the 
outstanding funded debt of the combined companies, so that the 
capital stock of the Reading Company represents 86% of this esti- 
mated net capitalization. 

Moreover, the net Fixed Charges, that is to say, taxes and in- 
terest on bonds, etc., held by the public, amount to only 45% of the 
Total Net Income, leaving a wide Factor of Safety for the securi- 
ties of the company. 

The surplus over and above the net fixed charges likewise 
leaves a considerable margin of safety for the dividends on the 
$70,000,000 of preferred stock, limited to 4% and non-cumulative. 

Equities Owned. 

Of the $200,000,000 and more of securities held, very much 
the larger part is represented by stocks and bonds of the three 
allied companies. The chief items of the latter are as follows : 



READING 599 

Reading Company general mortgage bonds $4,507,000 

Philadelphia and Reading Purchase bonds 20,000,000 

Philadelphia and Reading Purchase stock (all) 20,000,000 

Philadelphia and Reading Coal and Iron Company's 

stock (all) 8,000,000 

Philadelphia and Reading Coal and Iron Company's 

debt to Reading Company (all) 79,165,226 

Pennsylvania and Reading, account new machine shops 1,200,000 

Total $132,872,226 

Of the $70,000,000 of remaining securities the chief items are 
as follows : 

Central of New Jersey Company's stock, par value of $14,- 
504,000 purchased for about $23,000,000, and worth much more now. 

Lehigh Valley Railroad stock, par value $1,000,000, and now 
worth more than twice its nominal value. 

The Perkiomen R. R. stock (all), par value $1,500,000. 

The Philadelphia and Reading Terminal Company's stock, par 
value $8,500,000. 

Wilmington and Northern R. R. stock (practically all), 
$1,495,600. 

The total of sundry bonds is carried on the books at a valu- 
ation of $18,884,000; and sundry stocks (including the Central 
R. R. of New Jersey, etc.) are carried at a valuation of $52,355,000. 

The chief items of income of the Reading from its holdings 
include the interest on the Pennsylvania and Reading Purchase 
money mortgage, $1,200,000; dividends on stock (30%), $6,- 
000,000; interest on coal company debt (2%), $1,583,304; other in- 
terest and dividend receipts, $1,618,000. 

Coal Holdings. 

Over and above the net earnings of the railway company, of 
all the Reading Company's equities, by far the most important are 
those of the Coal Company. The coal company is organized with a 
capital of $8,000,000 and its funded debt, outside its large item of 
debt to the Reading Company, is very small. Its gross receipts for 
1906 amounted to $34,038,000 and in 1905 to $36,099,000. The net 
earnings shown in 1905 amounted to $4,063,000, but in 1906, owing 
to the troubles in the anthracite districts, this sum was reduced to 
$3,160,000. 



600 READING 

Improvements to the amount of $1,730,000 were charged off in 

1905, leaving an operating profit of $2,232,000. This was sufficient 
to pay the fixed charges, 2% on the Reading Loan, and set aside 
five cents per ton on all coal mined, amounting to $478,000. This 
latter sum goes to the Depreciation of Coal Land Funds. After all 
these charges and deductions, there still remained a small amount to 
charge to Profit and Loss. 

In 1906, although the improvements item was cut down to 
$1,131,000, the operating profit shown was only $2,029,000. This, 
with fixed charges and 2% on the Reading Company's loan, left 
a nominal deficit of $130,000, which was charged off from the profit 
account of previous years. 

The company's sales of anthracite showed an average price 
received of $3.19 per ton in 1906, and the operating profit, before 
improvement charges, showed an average of 30 cents per ton. In 
1905 this item was slightly higher. It will be noted that it is about 
the same figure as that shown by the reports of the Delaware and 
Hudson Company's coal operations. 

Assuming, as has been done in the case of the Delaware and 
Lackawanna and the Lehigh Valley, that this figure forms a fair 
basis upon which to estimate the value of the company's coal holdings, 
we should thence derive an enormous sum. The Reading's anthra- 
cite coal fields amount to 102,000 acres, and the estimate of unmined 
coal on this property, not including the discovery of new veins in 

1906, is put at 2,450,000,000 tons. If this enormous amount were 
computed to be worth 30 cents a ton to the operating company, 
this would fix the valuation for the Reading's holdings at 
$735,000,000. 

This seems like a perfectly fantastic sum, and yet if it were cut 
down two-thirds, and this unmined coal estimated as worth only 10 
cents per ton, this would still yield a sum of $240,000,000, or suf- 
ficient to pay off the outstanding bonds of the three companies now 
in the hands of the public, and show more than 50% on the total 
capital stock of the Reading Company besides. Whatever might 
be the realizeable value of this asset, it is undoubtedly this which, 
combined with the favorable outlook and efficient management, 
lifted the stock to so high a figure in 1905-6. 

At the present time this asset is covered by an entirety of stocks 
and debt of only $89,000,000, 



READING 601 

Nevertheless it is an extraordinary fact that for thirty years, 
from 1870 to 1900, these coal lands were, at least as regards their 
direct operation, a heavy burden for the owners, and that $79,- 
000,000 of debt was accumulated within this period, upon which, 
up to 1900, not a cent of interest was ever paid. Only 2°/o is paid 
now, without apparently much justification for an increased rate in 
the immediate future. 

Yet another striking fact is that in five years to 1906, the 
amount of anthracite mined has increased very slightly, and, cor- 
respondingly, the railway's anthracite tonnage, while the tonnage on 
bituminous coal has doubled. The Reading's great prosperity does 
not, paradoxical as it may seem, result from the working of its 
greatest asset. 

The truth as to these extraordinary holdings remains today 
much the same as in 1885, when it was very wittily summed up by 
the shareholders' committee, appointed to investigate these coal 
lands, and report upon their value: 

"To do this is as difficult as to fix a value upon the exclusive 
right to the fisheries off the coast of Newfoundland. It would de- 
pend entirely upon the amount required by the market, and the cost 
of producing the supply. The value cannot be based upon an esti- 
mate of the number of fish uncaught at so much per fish. This coal 
territory is one of the richest assets on the planet and will be so 
long as anthracite coal continues an essential commodity in do- 
mestic, manufacturing and other uses, and doubtless can be made 
to earn a profit both for the Railroad and the Coal and Iron Com- 
pany." 

Other Equities. 

The other equities are small as compared with those of the 
great Indeterminate. Nevertheless some of them are of value. The 
controlling interest in the Central of New Jersey was purchased 
on a basis of a little over $155 per share, is comfortably earning 
its dividend of 8% and is reasonably worth over $200 per share. 
The latter company is, moreover, heavily maintained, as reference 
to its report will show, and the Reading's interest in the concealed 
earnings of the road would readily amount to from half a million 
to one million dollars or more per year, for several years. 

The Reading's holdings of one million dollars of the stock of 
the Lehigh Valley will probably receive in the course of a year or 
two from 50 to 100% higher dividends than in 1906. 



602 



READING 



Yet another item is the stock of the Reading Iron Company 
which is paying 6% dividends, and apparently earning a great deal 
more. The net outstanding bonds of this company amount to only 
$200,000, while the assets show at above $12,000,000. This is ail 
clear to the Reading Company, which owns all the stock. The Iron 
Company owns 61,671 shares of the preferred and common stock 
of the Pennsylvania Steel Company, worth respectively above $100 
and $50 per share. 

Increase of Capitalization. 

Since its reorganization in 1896, the capital stock has not 
changed, and in the six years from 1900 the funded debt has in- 
creased but slightly. In this same period gross earnings have in- 
creased 50%, which speaks very highly for the prospects of the road. 



Year 


Common 
Stock 


Preferred 
Stock 


Funded Debt 
(net) 


Total 
Capital 


Gross 
Earnings 


1899-0. . 
1 905-6. . 


$70,000,000 
70,000,000 


$70,000,000 
70,000,000 


$120,434,288 
156,849,893 


$260,434,288 
L 296,849,893 


$26,109,733 
39,658,040 



Increase over six years: Total capital, 13%; gross earnings, 50%. 

Character of Traffic. 

Since the new order of things which came into the Reading's 
management through the assumption of control by the Baltimore 
and Ohio, that is to say, the Pennsylvania interests, and the Lake 
Shore, that is to say the New York Central interests, a marked 
change has come over the character of the business which the Read- 
ing has done. The road still remains essentially a "Coaler," that is 
to say, of its gross earnings over 40% is from its coal traffic, and 
this item was likewise considerably in excess of the entire amount 
received from other freight business. Since 1899 both classes of 
freight have increased over 60% ; but by far the larger part of the 
increase in coal traffic has been the added bituminous coal tonnage. 
This latter stands now only a little way below the anthracite ton- 
nage, and if this rate of increase should be maintained, it will soon 
exceed the anthracite. This latter gain is from an interest not 
owned or controlled by the railroad itself, and may therefore be 
considered a much healthier source of traffic than one specially 
fostered by a railway. 

All told, freight earnings yield over 80% of the railways's gross 
earnings, the passenger traffic yielding less than 15%. 



READING 603 

The company does not further itemize its traffic. 

Stability of Earnings. 

The figures for the full year of 1896-7 are not available, but 
since 1898 gross earnings, and likewise gross per mile have in- 
creased nearly 90%. The increase in mileage has been very slight. 

Moreover this gain in earnings has apparently been derived 
almost exclusively from gain in business, and not from an increase 
in rates. Apparently the rates which the Reading was receiving 
in 1906 are but little in advance of those of the bed rock year of 
1899. In that year the average rate per ton-mile on the coal traffic 
was .68c. per ton per mile, and on merchandise traffic, .95c. In 
1906 these rates were identically the same. Apparently the rates re- 
ceived on the anthracite tonnage are higher, but this has been bal- 
anced by the growth of the bituminous coal traffic, doubtless car- 
ried at a somewhat lower rate. Be this as it may, the average re- 
mains the same. 

Whence then has come the great increase of business shown 
in the tables below? Undoubtedly co-operation between the Van- 
derbilt and Pennsylvania interests has thrown to the Reading a 
considerable quantity of business which it did not have when it was 
an active competitor of both these systems. Moreover all the roads 
of the country have shown a vast development of business within 
the same period, and what remains may probably be set down to 
intelligent and energetic management. The following is the table 
for the nine years under view: 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1897-8 


914 
915 
1,000 
1,000 
1,003 
1,010 
1,012 
1,015 
1,000 


$21,475,242 
22,456,193 
26,109,733 
27,617,422 
29,170,378 
31,708,524 
34,250,489 
36,832,070 
39,658,040 


$23,503 


1898-9 


24,540 


1899-0 


26,109 


1900-1 


27,617 


1901-2 


29,083 


1902-3 


31,394 


1903-4 


33,844 


1904-5 


36,287 


1905-6 


39,658 







Maintenance. 

Under the new regime the Reading has been charged very 
heavily for maintenance and more heavily in 1906 than ever before, 
as the following table will show : 



604 



READING 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


2,825,301 
3,192,286 
3,297,350 
3,686,007 
4,103,534 


$2,970 
2,989 
3,047 
2,696 
3,195 


4,852 
5,627 
5,567 
6,330 


$6,502 
7,841 
8,674 
8,263 
9,525 


Average. . . . 


3,420,895 


$3,033 


$5,181 


$8,215 


Penn 


3,862,251 
2,771,846 
3,079,629 


3,468 
2,588 . 
4,754 


4,983 
3,429 
3,579 


8,632 


Lehigh Valley . 
Lackawanna . . 


6,017 
8,333 



Miles of extra main track, 540. 

The average for maintenance of equipment in 1906 was $2,- 
250 per locomotive, and $62 per freight car. The first was liberal ; 
the second undoubtedly represented some surcharge, especially in 
view of the fact that one-half of the freight cars thus included were 
coal cars of an average capacity of under 25 long tons. 

Undoubtedly, under the pinch of necessity, this charge could be 
considerably reduced without affecting the service of the road. 

Improvements. 

In addition to the regular charges for maintenance the sum of 
$3,539,000 was set aside from the surplus earnings of 1906 for im- 
provements, that is to say, a larger sum than that devoted to the 
entire charges for maintenance of way. 

Similar sums have been appropriated through previous years as 
follows : 

1901-2 t $2,006,400 

1902-3 2,228,700 

1903-4 1,273,700 

1904-5 979,600 

1905-6 3,539,300 



Total $10,027,700 

These are nothing like the sums which have been set aside by 
the Lackawanna, but mileage considered, they compare favorably 
with the Pennsylvania, and they exceed the appropriations of the 
Lehigh Valley. 

These items, too, are exclusive of sums averaging above one 
million dollars a year appropriated for "new work" ; that is to say, 
improvements to the coal company. 



READING 



605 



With such an improvement fund, the Reading should certainly 
be in good physical condition and as a matter of fact its borrowings 
in the five years have been small. Practically all the improvements 
which have been carried out in this period, and these have been 
extensive, have been paid for from surplus earnings. 

Surplus Earnings. 

Before charging off the extensive improvements and the 
amounts set aside for sinking fund, which amounted to $502,000 in 
1906, the surplus for six years has shown as follows : 







Dividends 


Per cent. 


Dividends 


Average 


Year 


Surplus 


on Prefer, 


Earned on 


Paid on 


Price (on 






red Stock 


Common 


Common 


$100 par) 


1900-1 


$6,058,892 


4 


4.6 




21 


1901-2 


5,249,713 


3 


3.5 




39 


1902-3 


7,293,874 


4 1} 


6.5 




62 


1903-4 


10,204,338 


4 4 


10.5 




51 


1904-5 


12,729,635 


4 4 


14.1 


3^ 


55 


1905-6 


12,513,563 


4 4 


13.8 


4 


107 



Adding together the three and a half millions devoted to rail- 
way improvements, the $1,100,000 for colliery improvements, and 
the $502,000 for sinking fund, the total deductions from the surplus 
shown above, for 1906, amount to $5,172,000, leaving a net surplus 
of $7,340,000, which is the amount shown in the consolidated ac- 
counts of the report, less the sinking fund payment. Deducting 
$2,800,000 4% dividends on the preferred stocks, this left about 
$4,500,000 net surplus for the $70,000,000 of common stock. This 
was equivalent to 6.5%. 

Dividend Record. 

In the early days the Philadelphia and Reading was a pros- 
perous road, and paid dividends from 1870 to 1875 inclusive at the 
rate of 10% per year. It suffered with other roads in the decline 
which set in about that time ; in 1876 it paid only 2^%, and nothing 
thereafter to 1900. 

The reorganization in 1886 did not bring it out of the slough 
into which it had fallen, and under the Corbin regime, it went from 
bad to worse. In 1890 A. A. McLeod was elected president and this 
seemed to be the beginning of a new era, but the ornamental 
dreams of that gentleman came to grief even before, the collapse 
of 1893. 



606 



READING 



In 1900 3% dividends were paid on the first preferred stock; 
in 1903 dividends were begun on the 2nd preferred, and in 1905 on 
the common. The full record of the reorganized road is as follows: 





1st 
Preferred 


2nd 
Preferred 


Common 


1900 


3 

4 
3 
4 
4 
4 
4 


4 
4 
4 




1901 


_ 


1902.. 


_ 


1903 


. 


1904 


_ 


1905 


3i 


1906 


4 







The Balance Sheet. 

The balance sheet of the Coal Company for the fiscal year of 

1906 showed current assets to the amount of $7,417,543 

current 'liabilities of 2,326,646 

leaving a working balance of $5,090,897 

Of the assets the cash item amounted to $417,612, and of the 
liabilities, about $1,588,000 was account with the Reading Company 
and P. and R. Railway. 

The amount to credit of Profit and Loss for the Coal Com- 
pany was $1,259,920, a slight reduction from the previous year, 
owing to the nominal deficit. 

The balance sheet of the Phila. & Reading Railway for the 
same year showed: 

Current assets $14,493,637 

Current liabilities 7,061,139 

i — ^— — — — — 

Leaving a balance of $7,432,498 

Of the assets, $3,044,417 was due from the Reading Company, 
and $1,022,313 from the P. and R. Coal and Iron Co. The item of 
cash was $922,544. The amount to the credit of Profit and Loss 
was $9,772,001. 

The balance sheet of the Reading Company showed : 

Current assets $2,721,699 

Current liabilities 5,282,734 

Leaving a debit balance of $2,561,035 



READING 607 

In addition to the assets included above, there was due from the 
Railway company on account of the new Reading machine 

shops $1,200,000 

Account bonds retired 394,844 

Current account 469,554 

A total of $2,064,398 

.or nearly sufficient to balance the debit shown above. The item of 
cash in the current assets was $1,757,076. The amount to credit of 
Profit and Loss was $8,794,398. 

Investment Value. 

Few roads have shown such extraordinary rise in the value of 
their stocks as the Reading in the six years following 1900. The 
Reading stock, like that of the Pennsylvania and the Lehigh Val- 
ley, is in $50 shares, but the following quotations are made on the 
basis of a par value of $100, that is to say of two shares each, con- 
forming to the custom of the New York Stock Exchange. 

In 1900 the first preferred sold at 49, rising to 90 in 1902, and 
declining to 73 in the slump of 1903. It sold as high as 96 to 97 
in 1905 and 1906. In other words, in the six years it about doubled 
in value. 

Limited to 4% dividends, this stock is a solid investment with 
a wide margin of safety on the dividend, and is readily entitled to 
sell upwards of 90, that is to say, upwards of $45 per share, accord- 
ing to the prevailing rates for money. 

The second preferred in 1900 sold below 24, that is to say be- 
low $12 per share, rising to 80 in 1902, and falling to 55 in 1903-4. 
It sold at 101 in 1905 and 1906. 

The higher price shown by the second preferred is due to the 
fact that the company has a right to convert this stock into one-half 
first preferred and one-half common, and when the common stock 
rose to quotations of 160, it was natural that this possibility should 
create a slight preference in favor of the stock. 

Still more astonishing was the rise in the price of the common. 
Reading common sold down to 15, that is to say $7.50 per share, in 
1900, and in the succeeding five years it doubled its value four times 
and more. It sold up to 78 in 1902, declining to 38 in 1903. It 
more than doubled this figure in the succeeding year, rising to 82, 



608 READING 

then to 143 in 1905 and to 164 in January, 1906; that is to say, in 
1906 it sold for more than ten times the price of 1900. 

Quotations of 164 for a 4% stock seem fantastic. The yield to 
the investor on this basis is only 2y 2 %. Obviously such a price 
was in anticipation of an increased dividend ; but it should be said 
further, that this high figure was undoubtedly due to stock market 
manipulation. This was relatively easy, owing to the small floating 
supply of the stock. It seems to be generally agreed that the heavy 
holders did not sell even at these high figures, and the inference is 
therefore that those in the confidence of the management anticipate 
an increase in the dividend in the near future. Undoubtedly too, the 
high price for Reading was in a considerable measure stimulatd by 
the extraordinary rise in the price of Lackawanna. 

In the very moderate setback in the Spring of 1906, Reading 
sold down to 112, the result of weak speculative holders being 
obliged to throw over their margined stock for what they could get. 
The stock rose again to 156 in the fall of the year. It fell to 91 in 
March, 1907. 

The question remains, What is a fair price for Reading? A 
glance at the table of surplus shown makes clear that even with 
heavy maintenance charges, and after charging off large sums for 
improvements, there has been sufficient surplus to meet a 6% divi- 
dend in both 1905 and 1906. This could have been paid comfort- 
ably. 

But the prosperity of the Reading is acutely dependent upon 
the anthracite coal industry, and the bituminous as well. A setback 
from the highly prosperous conditions of the past few years, or the 
return of labor troubles would undoubtedly affect its earnings 
heavily. While therefore the road under present conditions seems 
amply able to earn a 6% dividend on its common, and at the same 
time set aside a large amount for improvements, it is evident that 
there is no solid guarantee that such a dividend could be main- 
tained under the stress of adversity. 

On the other hand it is clear that for the first time in long years, 
the Reading is under an efficient and conservative management, and 
with the working control of the company vested in rival and com- 
petitive lines, there seems little likelihood of a return of rate wars. 
Beyond all this, after thirty years of deficits, the Coal Company is 
earning its way, and a small percentage on its debt besides. 

Owning all the stock and practically all of the debt of the Coal 
company, Reading absorbs absolutely all of the surplus the coal 



READING 609 

properties can show. It is not clear, even from the progress made 
in the six years under review, that this surplus will rise very rapidly, 
but if anthracite conditions should continue favorable, it ought to 
improve somewhat. The outlook for Reading from this source 
therefore, seems fairly good. 

The earnings of the railway have increased splendidly under 
the new regime, and barring a heavy setback in business conditions, 
these should continue to increase, even though it might not be at 
the same rapid rate. 

Prosperous conditions through 1907-8 should certainly place 
the Reading on a five if not a six per cent, basis, with every pros- 
pect that in the course of time, these may be further increased. 
There is no road in the United States with anything like the potential 
assets of the Reading, and while its collossal coal holdings are 
difficult of assessment, they are certainly there. Though the possi- 
bilities of this asset should not be allowed to dazzle the investor, it 
is certainly to be taken into consideration in estimating the value 
cf the stock. 

Probably from the foregoing discussion the investor will con- 
clude that while the prices of 1906 were high, they might readily be 
regained, even if a substantial recession should come. A highly 
speculative stock like Reading common, more or less under the con- 
trol of market manipulators, is apt to show very violent fluctuations. 
It is not at all impossible that under panicky conditions, which re- 
currently come to the Stock Exchange, quotations might return to 
the low levels of 1906-7, i.e. to 112-91, and even, under stress, below 
this. 

Realizing all this the shrewd investor will probably watch for 
such opportunities, believing that under 125 Reading common pre- 
sents an attractive purchase. On a 6% basis, with favorable pros- 
pects, the stock would eventually sell at 150, and perhaps higher, 
for its increases in earnings are not, like the Pennsylvania, the result 
of heavy and costly improvements, the gain from which is covered 
largely by increased charges on new securities. But it should be 
added that there are few stocks on the list more subject to in- 
fluences quite extraneous to the conditions and prospects of the 
property itself. In other words, it is one of the stock market play- 
things. 



30 



ROCK ISLAND SYSTEM. 

ROCK ISLAND COMPANY. 
CHICAGO, ROCK ISLAND AND PACIFIC RAILROAD. 
CHICAGO, ROCK ISLAND AND PACIFIC RAILWAY. 

The Rock Island System, so-called, is made up of several 
separate companies, separately operated, but under the same 
ownership and practically the same management. The system 
is one of the largest in the United States, operating in 1906 nearly 
fourteen thousand miles of road. If we add the Alton, which is 
practically owned by the Rock Island, this would bring the total 
to nearly fifteen thousand, reaching into seventeen states and 
territories. The lines of the system practically gridiron the vast 
Southwest, extending from Chicago and New Orleans, and west- 
ward to Denver and El Paso, and covering one of the richest sec- 
tions of the country. 

The corporate organization of the system is somewhat com- 
plex. The head of the organization is a holding corporation 
known as the Rock Island Company, with a capital outstanding 
of $138,000,000, and no debt. This company owns all of the stock, 
save the directors' shares, of the Chicago, Rock Island and Pacific 
Railroad Company. This corporation in turn owns about 93% 
of the stock of the Chicago, Rock Island and Pacific Railway 
Company, and all the common stock, carrying control, of the St. 
Louis and San Francisco Railroad Company, commonly known 
as the "Frisco." The Frisco, in its turn, owns a largely control- 
ling interest in the Chicago and Eastern Illinois, and this com- 
pany, again controls the Evansville and Terre Haute, which in 
turn leases the Evansville and Indianapolis Railroad Company. 
The Railway Company owns practical (though not absolute) 
control of the Chicago and Alton, which up to 1907 was operated in 
the joint interest of the Rock Island and the Union Pacific Railroad, 
the latter owning the larger part of the balance of the stock. 

(610) — 



611 



ROCK ISLAND 



This intricate (and wholly needless) scheme will perhaps be 
better held in mind by means of the following diagram : 





ROCK ISLAND COMPANY 

Capital, $138,405,682 














CHICAGO ROCK ISLAND C& 

PACIFIC RAILROAD CO. 

All owned by the above 


















C. R. I. C& P. RAILWAY 

COMPANY 

93% of stock owned by 
preceding Co. 




ST. LOUIS C& S. F. R. R. 

Entire Common stock carrying 

control, owned by preceding 

Company 












CHICAGO C& ALTON 

Very close to a majority owned 
by preceding Co. 




CHICAGO C& EASTERN 

ILLINOIS 

Owned largely by preceding 
Company 



Only the part of the system known as the "Rock Island 
Lines" ; comprising the old Chicago, Rock Island and Pacific, 
and its subsidiaries, will be considered in the analysis which fol- 
lows. The Frisco system, including the Chicago and Eastern 
Illinois, etc., will be separately treated under the head of the St. 
Louis and San Francisco Railroad. 

History. 

The Rock Island, as it was currently known even before it 
took that name, has the distinction of being the first road to 
bridge the Mississippi River, and the second railway to reach the 
Missouri. It was organized in 1852 to build a railroad from Chi- 
cago to Rock Island, where a small island in the middle of the 
Mississippi offered a very favorable site for a bridge. This 
bridge was complete in 1856. It is amusing now to read of the 
efforts of the steamboat interests to prevent its erection, and 
even four years after its completion, that is to say in 1860, they 
actually obtained a decree from the United States courts for the 
removal of the bridge as "a material obstruction and a nuisance." 
This decree was signed by Judge Love, a famous western jurist. 



612 ROCK ISLAND 

The attorney of the railway company was Abraham Lincoln, who 
carried the case to the United States Supreme Court, and won, 
though only by a narrow margin. In the meantime repeated ef- 
forts were made to burn the bridge, and Frank H. Spearman, in 
his interesting book on "The Strategy of Great Railroads," re- 
lates how two employees of the Chamber of Commerce of St. 
Louis were arrested and tried for conspiracy to destroy the 
bridge in this way. 

The part of the road separately built in Iowa was sold under 
foreclosure in 1868, and purchased by the parent company, the 
consolidation taking on the name of the Chicago, Rock Island 
and Pacific Railzvay Company. The line to Omaha was com- 
pleted in 1869, in the same year as the completion of the Union 
Pacific-Central Pacific transcontinental line, and two years after 
the completion of the Chicago and North Western to the same 
point. 

Thereafter the road grew rapidly, extending westward to 
Colorado Springs and Denver, and by means of a subsidiary com- 
pany, the Burlington, Cedar Rapids and Northern, reaching to 
St. Paul and Minneapolis, and into South Dakota, while the con- 
struction of lines southwesterly from Kansas City carried the 
road finally to El Paso in Texas, where its through coaches are 
taken over the lines of the Southern Pacific to California. 

The road had long been under the domination of the Cables 
in Illinois, but in 1901 a controlling interest was acquired by a 
syndicate headed by W. B. Leeds, formerly president of the 
American Tin Plate Company ; Daniel G. Reid, his partner in the 
tin plate industry ; William H. and J. Hobart Moore. Mr. Leeds 
was elected president on January 1st, 1902, and in the same year 
the complex series of companies described above were organized. 
The railroad company, organized in Iowa, offered the share- 
holders of the railway company to exchange their stock on the fol- 
lowing basis : for each one hundred dollar share of the railway com- 
pany's stock, $100 in 4% collateral trust bonds, and $70 preferred 
stock, and $100 of common stock of the Rock Island Co. ; that 
is to say, the railway shareholders, for each $100 share, received 
$270 of the new securities. The Chi., R. I. & Pac. Railway 
company was then paying and for some time previously had been 
paying 5% on its capital stock. Through the twelve months pre- 
ceding the organization of the new railroad company, the price 
of the railway stock had averaged $155 per share, and this in turn 



ROCK ISLAND 613 

was a heavy rise from the average of the fiscal year of 1901. 
The new securities were placed on the market in December, 1902, 
and through this and the following months sold at high prices. 
Had a shareholder made the exchange at that time and then un- 
loaded his securities, he could have secured a maximum price of 
$89 for his bonds ; $86 per share for his preferred stock (equiva- 
lent to $60 for the amount received) and $53 for his common 
stock, a total of $202 for securities that a year previously brought 
little more than half this. As a matter of fact, the railway stock 
about this period, sold as high as $206 per share. 

In the general slump of 1903 and 1904, that followed, the 
bonds sold down to $66, the preferred stock to $56, and the com- 
mon stock to $19, or a drop in the price of the securities received 
of $124. 

Up to June 30th, 1906, all but 7% of the old railway stock 
had been exchanged, and in addition the railroad company had 
acquired $28,904,300 par value, the entire outstanding common 
stock of the St. Louis and San Francisco, paying for the same 
$17,342,580 5% collateral trust gold bonds of the railroad com- 
pany, and about $19,500,000 common stock of the Rock Island 
Company. 

In the year preceding this exchange, Frisco Common ranged 
betwen $90 and $63 per share, or an average price of $76, the 
price of $63 per share being reached in April, 1903, three months 
before the exchange ; so that the purchasers paid for securities 
whose average market value through the preceding year was 
around $22,000,000, securities to a face value of $36,842,580, of 
which $17,342,586 were 5% gold bonds. The annual interest 
charges on these bonds to the Rock Island Railroad are $867,041. 
No dividends had ever been paid on the Frisco stock up to the 
time of the purchase, and none have ever been paid since. 

In 1904 the railway company acquired nearly absolute con- 
trol of the Chicago and Alton, holding in 1906, $14,320,000 par 
value of the common, and $4,870,000 preferred stock, a total of 
$19,190,000 out of $39,986,100 outstanding stock, an increase of 
$400,000 par value of the preferred from the preceding year. 

At the close of the fiscal year of 1906 the Rock Island Lines 
were operating 7,426 miles, at the same time the St. Louis and 
San Francisco was operating 5,058 miles; the Eastern Illinois 
949 miles, the Evansville and Terre Haute 310 miles, bringing 
the total mileage operated up to 13,743. With the Colorado and 



614 ROCK ISLAND 

Southern, the Rock Island is constructing the Trinity and Brazos 
Valley line from Houston to Galveston. The St. Louis and San 
Francisco is also financing the construction of the Colorado 
Southern, New Orleans and Pacific, extending from Houston, 
Texas, to Baton Rouge, from which by trackage rights it will 
reach New Orleans. This new construction will give both 
roads access to the principal ports of the Gulf. The St. Louis, 
Brownsville and Mexico is also under construction from Houston 
to Brownsville on the Rio Grande River, the Mexican border, by 
B. F. Yoakum, the directing head of the Rock Island system. 

The Rock Island-Frisco system is becoming an active com- 
petitor of the Southern Pacific, so that with the completion of 
the Western Pacific, it may be supposed that its traffic will natu- 
rally be drawn to the new Gould line. The Rock Island lines meet 
the Denver and Rio Grande in Colorado, and the completion of 
the Western Pacific would afford the Rock Island a new outlet 
to the Pacific. In any event it is evident that the new roads now 
under construction will work a considerable transformation in 
traffic arrangements throughout the great Southwest. 

Ownership. 

Taking the constituent companies in order, the directorate 
of the Rock Island Company includes William H. Moore, also a 
director in the First National Bank, New York, and in the 
United States Steel Corporation; J. H. Moore, his brother; D. 
G. Reid, also a director in United States Steel; B. F. Yoakum, 
former president and now chairman of the board of the St. 
Louis and San Francisco; F. L. Hine, vice-president of the First 
National Bank, New York, also a director in the Liberty Na- 
tional ; John J. Mitchell, president of the Illinois Trust Company ; 
James Speyer of Speyer and Company, bankers, also a director 
in the Baltimore and Ohio ; R. R. Cable, formerly chairman of 
the board ; Robert Mather, president ; George T. Boggs, secre- 
tary and treasurer; Ogden Mills, D. C. Boissevain, New York; 
George C. McMurtry, president of the American Sheet Steel 
Company and James Campbell, St. Louis. 

The chairman of the board is Benjamin F. Yoakum, and the 
Finance committee (the equivalent of the Executive committee) 
consists of W. H. Moore, chairman, Robert Mather, James H. 
Moore, B. F. Yoakum, D. G. Reid, F. L. Hine and James Speyer. 



ROCK ISLAND 615 

The directors of the subsidiary Chicago, Rock Island and 
Pacific Railroad Company are Messrs. William H. and James H. 
Moore ; B. F. Yoakum, D. G. Reid, and Robert Mather, president. 

The directorate of the Railzvay company includes: Messrs. 
William H. and James H. Moore, Yoakum, Reid, Mather, Mitch- 
ell, Cable, Hine, Mills, McMurtry, and in addition, Alexander E. 
Orr, former president of the New York Life Insurance Company. 

The executive committee consists of B. F. Yoakum, chair- 
man, William H. Moore, James H. Moore, Robert Mather, D. G. 
Reid, F. L. Hine and James Campbell. The executive committee 
of the St. Louis and St. Francisco is the same. 

The Rock Island representatives on the Alton board are : 
William H. Moore, James H. Moore, D. G. Reid, Robert Mather, 
B. F. Yoakum, and John J. Mitchell. Mr. Yoakum, in 1906, was 
made chairman of the board. By virtue of the fact that he is 
chairman of the boards of all the separate organizations of the 
Rock Island system, and also of the Alton, Mr. Yoakum may be 
regarded as the present operating head of the system, as Judge 
Wm. H. Moore is its financial head. 

Capitalization. 

The principal items in the complicated organization of the 
Rock Island system, June 30, 1906, were as follows : 

Rock Island Company. 

Common stock $89,448,802 

Preferred stock 48,956,880 

Total stock $138,405,682 

Surplus, 1906 $37,271 

Chicago, Rock Island and Pacific Railroad Company. 

Capital stock $145,000,000 

Funded debt 87,280,980 

$232,280,980 
Surplus $257,286 

Cash in treasury $874,111 



616 ROCK ISLAND 

The entire capital stock except $500 of directors' shares, is 
owned by the Rock Island Company. 

Chicago, Rock Island and Pacific Railway Company. 

Capital stock $75,000,000 

Funded debt 164,587,000 

Equipment Trusts 1,250,000 

Notes 13,500,000 



$254,337,000 
All but $4,889,582 or about 7% of the stock is owned by the 
railroad company. 

Capitalization of the System. 

The following table of capitalization, consolidates the capital 
of the Rock Island system and includes: (1) the outstanding 
stock of the Rock Island Company and of the Chicago, Rock 
Island and Pacific Railway Company; and the funded debt and 
other obligations both of the railroad and railway companies. 
This gives the capitalization of that part of the combined Rock 
Island-Frisco system known as the Rock Island Lines, operating 
in 1906 an average of 7,218 miles. 

Capitalization. 

Common stock $89,448,802 

Preferred stock 48,956,880 

Total stock $138,405,682 

Funded debt— The Railway Co 164,587,000 

Equip. Trusts 1,250,000 

Notes 13,500,000 

Funded debt— The Railroad Co 87,280,980 

C. R. I. & P. Ry stock 4,889,582 

Total capital $409,913,244 

Rentals capit. at 4% 24,961,375 

■ ■ ■ ■ ' *- — — ■ ■ « 

Approx. gross capitalization $434,874,619 

Securities held (Inc. $28,904,300 St. L. 

& S. F. stock at par) 47,601,810 

Approx. net capitalization $387,272,809 



ROCK ISLAND 



617 



Approx. net capital per mile $52,268 

Average miles operated 7,218 

Net earnings on net capital 4.2% 

Stock on net capitalization 36% 

Fixed Charges on total net income 83% 

Factor of Safety 17% 

In the above table the entire rentals paid have been capital- 
ized and not the net rentals. The reports do not itemize the 
"Other Income" of the system, so that the rentals received by 
the Rock Island have not been deducted in the make-up of the 
above estimate. 

As a counter-weight to this, the $28,904,300 of the St. Louis 
Southwestern common stock in the treasury of the railroad com- 
pany has been entered in the above at par, although it is receiv- 
ing no dividends and never has received any. 

Aside from the St. Louis and San Francisco common stock 
there are held by the railway company, securities to a par value 
of $38,757,094. The total of Other Income received by the sys- 
tem was approximately $1,057,000, which, if derived exclusively 
from income from investments would give an approximate value 
to the securities held of $25,000,000, so that the valuation of 
$47,000,000 given in the table above, leaves a leeway of $20,- 
000,000 for the value of St. L. & S. F. stock. 

On this estimate of the approximate net capitalization the 
average capitalization per mile comes out at $52,268. The Rock 
Island formerly was usually classed in a group of four roads: the 
Burlington, the North Western, and the St. Paul. Latterly it has 
pushed more distinctly into the territory of the Missouri Pacific. 
To estimate its capitalization then, we may compare it with these 
four other roads in the following fashion (figures for 1906) : 



Road 


Gross Earnings 


Estimated Net 


Per cent of Net 


per Mile 


Cap. per Mile 


Earnings on Capital 


North Western. 


$8,545 


$30,252 


10.5 


St. Paul 


7,961 


33,900 


9.7 


Burlington 


8,335 


29,128 


8.7 


Missouri Pacific 


7,101 


30,745 


7.7 


Rock Island. . . 


7,098 


52,268 


4.2 



The percentage of net earnings shown by the Burlington on 
its estimated net capitalization is actually somewhat higher than 
the figure given above, owing to the fact that it charges its im- 



618 ROCK ISLAND 

provements directly to operating expenses instead of making a 
separate account, as do the other roads. 

Beyond this it will be seen that the larger part of the Rock 
Island high capitalization is in the form of fixed debt, and that 
the capital stock outstanding represents only a little more than 
one-third of the estimated net capitalization. 

All this goes to explain why it is that a prosperous road like 
the Rock Island, in a marvellously rich country, and with gross 
earnings per mile well up around those of its chief competitors, 
and even in the highly prosperous year of 1906, had to pay 83% 
of its total net income for fixed charges. This percentage com- 
pares with 45% on the Burlington; 32% on the St. Paul, and 39%? 
on the North Western. 

In 1902, the last year before the Chicago, Rock Island and 
Pacific Railway Company was turned into the Rock Island sys- 
tem, the road showed gross earnings of $7,278 per mile ; its total 
capitalization in stocks and bonds per mile of operated road was 
$37,456, of which more than one-half was stock. The showing 
of net earnings on capitalization was 7.8%, and the fixed charges 
consumed 40% of the total net income, or about the same as the 
Burlington, the North Western and the St. Paul in 1906. These 
are rather startling changes. 

Of the $266,000,000 of the outstanding bonds and debts of 
the system, very nearly $70,000000 is represented by the bonds 
issued by the Railroad company in exchange for Railway com- 
pany stock, and $17,000,000 issued in exchange for St. Louis 
and San Francisco common stock. These two issues make up 
about one-third of the total. In some sense the $70,000,000 of 
collateral trust bonds mean but little more than a 4% preferred 
stock, with a difference however to the Rock Island Company, 
that if the earnings of the Railway were insufficient to meet 
these interest charges, the Rock Island Company's principal as- 
set would revert to the holders of the Railroad company's bonds. 

Equities Owned. 

The principal equity of the Rock Island Company is its hold- 
ing of nearly $29,000,000 of the St. Louis and San Francisco com- 
mon stock. Reference to the report will show that the Frisco 
portion of the combined system is broadly similar in its financial 
condition to that of the Rock Island portion; that is to say, in 
1906 its gross earnings were $6,322 per mile, and its approxi- 



ROCK ISLAND 619 

mate net capitalization per mile was $46,710. On this esti- 
mate of its net capitalization, net earnings showed 4.8%, as 
against 4.2% for the Rock Island; the stock represented only 
21% of the estimated capitalization; fixed charges, in the highly 
prosperous year of 1906, consumed 82% of the total net income, 
as against 83% for the Rock Island. In 1906 the road showed a 
nominal surplus of $2,309,135, which was equivalent to 4% on 
both the first and second preferred, and 5% on the Rock Island's 
holding of the common; but it is to be noted that in that year the 
Frisco's average maintenance charges per mile were $1,548 
against $1,933 on the Rock Island; $1,902 for the Missouri, Kan- 
sas and Texas; $1,948 on the St. Louis Southwestern, all 
three roads of about the same traffic density as the Frisco. In 
other words, the Frisco's total charges in 1906 were about $400 
per mile less than the average of these other three roads. This, 
on 5,058 miles of operated road, would represent a difference of 
over $2,000,000, or the larger part of the surplus shown for the 
year, and very considerably more than the Rock Island's entire 
equity. 

On the Rock Island's holding of Alton stock it received in 
1906 the full 4% to which the preferred is entitled. The surplus 
remaining after maintenance charges about the same for a 
three years' average, represented about one per cent, on the com- 
mon stock, as against 4% in the preceding year, and 2.7% in 1904. 

Up to and during the fiscal year of 1906 the Alton was di- 
rectly under the management of Mr. E. H. Harnman, President 
of the Union Pacific and chairman of the executive committee. 
At the close of the fiscal year, under an arrangement that the 
Union Pacific and the Rock Island shall manage the road in alter- 
nating years, Mr. Yoakum succeeded Mr. Harriman. Mr. Harri- 
man, or the Union Pacific, owning only preferred stock, had no 
interest whatever in showing earnings for the common stock, 
of which Rock Island owns $14,320,000. The Alton scale of 
maintenance charges has been very liberal, but it would require 
a reduction of $200 per mile in these charges for each one per 
cent, surplus shown as earned on the common, supposing earn- 
ings to remain the same. The value of the Rock Island's equity 
in this stock, therefore, over and above the actual receipts was in 
1906 small. 

In 1905 the Rock Island purchased $2,500,000 5% bonds and 
$2,400,000 of the capital stock of the Consolidated Indiana Coal 



620 



ROCK ISLAND 



Company; and in 1906 had secured $1,700,000 par value capital 
stock of the Deering Coal Company of Illinois, at a cost of 
$540,000 stock and $200,000 5% bonds at par, with an option on 
$800,000 further stock of that company. The report does not item- 
ize the returns from these smaller investments. 

Increase of Capitalization. 

The capitalization and earnings of the Chicago, Rock Island 
and Pacific Railway at the close of the fiscal year of March 31st, 
1901, and the capitalization and earnings of the Rock Island sys- 
tem at the close of the fiscal year of 1906 compare as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1901 


$50,000,000 

89,448,802 




$68,081,000 
270,507,562 


$118,081,000 
409,913,244 


$25,364,695 


1906 


48,956,880 


51,237,858 



About $17,000,000 of bonds and as much more of stocks were 
exchanged in the purchase of the common stock of the St. Louis 
and San Francisco, and the acquisition of the Alton and other 
securities by the Railway company consumed a little over 
$18,000,000 more, or a total of approximately $55,000,000. De- 
ducting this $55,000,000 from the $408,000,000 of gross capitaliza- 
tion of 1906, the net increase of capitalization in five and a quar- 
ter years was therefore about $235,000,000, or approximately 
200%, as against an increase of gross earnings in the same period 
of 100%. This roughly explains why it was that Rock Island com- 
mon in 1907 was selling around $18 per share as against a top 
figure of $206 per share for C. R. I. & P. Railway in 1902. 



Character of Traffic. 

Passenger earnings on the Rock Island are high, contribut- 
ing about 25% of the gross earnings. Of the freight tonnage in 
1906, 26% was agricultural products and 8% animal products, or 
a total of 34% from the farms ; bituminous coal amounted to 
19% ; lumber to 9%, the balance being widely distributed. 

Covering as with a gridiron the lower and western part of 
the Mississippi Valley, the prosperity of the Rock Island is in the 
end essentially dependent upon the prosperity of the farms. It is 
most vitally dependent upon the corn crop, that crop from Iowa 
southward generally predominating over the wheat crop. 



ROCK ISLAND 



621 



Stability of Earnings. 

In 1896 the Rock Island was operating 3,500 miles of road ; 
in 1906 this mileage had been doubled, while the earnings per 
mile rose from an average of $4,861 in 1896 to $7,000 in 1906, an 
increase of very nearly 50%. This means that in the face of an 
enormous expansion of mileage, the larger part of which has 
been through much more thinly settled country than the older 
part of the line, the Rock Island has still been able to increase its 
average earnings per mile by more than half. No road in the 
west, all things considered, has in this regard made a better 
showing. The items through the period under view have been 
as follows : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


3,571 
3,571 
3,568 
3,619 
3,665 
3,772 
3,935 
6,978 
7,205 
7,232 
7,218 


$17,359,653 
16,728,685 
20,382,520 
20,647,246 
23,211,990 
26,075,574 
28,683,824 
44,376,619 
44,969,491 
44,051,509 
51,237,858 


$4,861 


1896-7 


4,684 


1897-8 


5,712 


1898-9 


5,704 


1899-0 


6,384 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


6,912 
7,287 
6,359 
6,241 
6,091 
7,098 



Maintenance. 



The Rock Island's traffic 
that of any of its immediate 
maintenance charges for the 
follows : 



density is considerably lower than 

competitors. These items and the 

various roads in 1906 compared as 



Year 



Traffic Density 



Maintenance per Mile 



Way 



Equipment 



Total 



1900-1 

1901-2 

1902-3 

1903-4 

1904-5 : . . 

1905-6 

Average. . . . 

Burlington. . . . 
Northwest. . . . 

St. Paul 

Mo. Pac. (2yrs) 
Atchison 



468,471 


$1,203 


$780 


$1,983 


471,571 


1,192 


745 


1,937 


428,116 


977 


598 


1,575 


451,181 


950 


711 


1,661 


438,531 


804 


797 


1,601 


514,767 


1,011 


922 


1,933 


462,106 


$1,022 


$759 


$1,781 



580,024 
640,983 
601,003 
623,807 
577,005 




1,032 
858 
632 
821 

1,113 



2,136 
1,849 
1,561 
1,640 
2,236 



622 



ROCK ISLAND 



For the year of 1906, the following comparisons are of 
interest: 



^Road 


Gross 
Earnings 
per Mile 


Traffic 
Density 


Maintenance 


Total 


Way 


Eq'p't. 


Northwestern. . . 
St. Paul 

Rock Island. . . . 


$8,335 
8,545 
7,961 
9,253 
7,098 


713,568 
694,630 
670,373 
693,873 
514,767 


$1,271 

924 

857 

1,479 

1,011 


$1,533 
1,215 

804 
1,271 

922 


$2,804 
2,139 
1,661 
2,750 
1,933 



From the above table it will be seen that, traffic density com- 
pared, the Rock Island's maintenance charges were higher in 1906 
than those of any other road, save the Atchison and the Burling- 
ton. With a traffic density one-quarter less than that of the St. 
Paul, and . mileage earnings nearly $900 per mile less, the Rock 
Island's total maintenance was $270 per mile more. It seems dif- 
ficult to believe that with one-quarter less the average tonnage to 
handle, way and equipment maintenance should require more on 
the Rock Island than on the St. Paul, and this difference of $270 
per mile would have meant a difference in the surplus shown by 
the Rock Island for the year of $1,950,000. If this be added to 
the $2,100,000 of surplus appropriated for special improvement 
and equipment fund, this would represent a total of $4,000,000 
spent from earnings on the improvement of the road during the 
year. This compares with $6,000,000 appropriated by the North- 
western, and $4,765,000 for the St. Paul. It will be seen therefore 
that the total maintenance and improvement charges of the Rock 
Island for 1906 compare very favorably with those of its most 
prosperous rivals. 

It is to be noted further that while gross earnings in 1906 
increased about 16%, maintenance charges increased about 20%, 
so that the road in that year was relatively better maintained than 
in 1905. In other words, for the year the road was able to add 
$2,382,000 to its maintenance charges and set aside in addition, 
$2,108,000 for the special improvement and equipment funds. As 
there were no appropriations from earnings in 1905, the additional 
amount turned back into the road in 1906 was $4,490,000. 

Improvements from Earnings. 

From the surplus of 1902 the sum of $1,104,544 was appro- 
priated for additions and improvements, and in 1906, $2,108,279. 



ROCK ISLAND 623 

There were no such special appropriations in 1903 and 1904; in 
1903 the sum of $1,018,231 was charged off for depreciation of 
structures and equipment and deducted from the capital account. 

Surplus Earnings. 

The surplus earnings of the Railway Co. available for dividends 
and improvements for six years have been as follows : 

Per cent, earned on 

Year. Amount. common stock. 

1900-1 $5,097,018 10.1 

1901-2 7,220,941 12.0 

1902-3 9,572,911 . 12.7 

1903-4 6,028,198 8.0 

1904-5 4,733,109 6.3 

1905-6. 6,785,832 9.0 

By the close of the fiscal year of 1905 practically 93% of the 
railway company's stock, and all of the St. Louis and San Fran- 
cisco common had been exchanged. The interest charged on the 
two sets of collateral trust bonds issued by the Railroad 
amounted to $3,495,113 in 1905 and $3,664,441 in 1906. 

As the San Francisco stock paid no dividends it was needful 
that the Railway company declare a dividend of 5*4% on its 
stock in order that the Railroad company might meet its fixed 
charges. Deducting this percentage from the percentage earned 
on the Railway stock, it will be seen that the company barely 
earned its fixed charges in 1905. The 4% dividend declared in 
that year was paid by means of a special dividend of 1.63% from 
a surplus fund of the railway. 

Had all of the surplus earned by the Railway in 1906 been 
paid out in dividends, the Railroad company's share would have 
meant an income of about $6,300,000, which, after deduct- 
ing interest charges on the collateral trust bonds, would have left 
$2,600,000, or sufficient to have paid the full 4% on the preferred 
and left a balance of about $600,000, equivalent to about two- 
thirds of one per cent, on the common. Instead of this, only one 
per cent, was paid during the year on the preferred and as al- 
ready noted, $2,108,000, practically all the balance, was appro- 
priated for improvements. 



624 ROCK ISLAND 

Dividend Record. 

In the old days the Rock Island was a big dividend earner. 
It paid as high as 10% in 1879; in 1880 there was a stock dividend 
of 100%, but in the face of this the road continued to pay 8% up 
to 1888, or the equivalent of 16% on the original stock. The 
dividend was cut down to 3% in 1891, and in 1895 to 2%, so con- 
tinuing to 1896. In 1898, 4^% was paid, and from 1899 to 1902, 
the year of the recapitalization, 5%. The Railway company paid 
7^% in 1903; 8^% in 1904; 6% and 1.63% extra in 1905, and 
6j4% in 1906. Three per cent, was paid on the Rock Island Com- 
pany preferred in 1903, the full 4% in 1904 and 1905, and one per 
cent, in 1906. 

No dividends have been paid on Rock Island common. 

The Balance Sheet. 

From the current assets shown in the balance sheet, there 
have been deducted the equipment trusts (two series) of the 
Rock Island Improvement Company, with the treasury securities 
already included in the table of capital account above, 'materials on 
hand and advances to coal companies, in conformity with the pro- 
cedure in this book. 

These deductions made, the current assets showed $11,256,005 

and current liabilities 7,140,201 

leaving a working balance of $4,115,804 

In addition to the above there were deferred assets of $1,- 
163,788, and deferred liabilities amounting to $3,032,532 and open 
accounts in suspense, $509,364. Adding together these various 
items, the ,ifh]|i' 

Current Assets amounted to $12,419,793 

And the Current Liabilities to 10,682,097 

Leaving a balance of $1,737,696 

The item of cash on hand was $7,148,301 and the balance to 
credit of Profit and Loss, $17,202,469. 

Investment Value. 

The stock of the C. R. I. and P. Railway outstanding has re- 
ceived since the reorganization 29.13%, or an average of 7.28% 



ROCK ISLAND 625 

for the four years. In 1906 the dividend was 6%%. Were this 
stock converted it would receive in exchange $100 in 4% col- 
lateral trust bonds secured by a deposit of the stock, average 
price in 1906 about $79 ; $70 preferred stock, of an average price 
of $65 per share, equivalent to $45 in the exchange, and $100 
Rock Island common, of an average market price of about $26; 
or securities to an average market value of $150 for each $100 
share. 

The dividend on this stock must be paid or the Railroad Com- 
pany, and hence the Rock Island Company, receives no income, and 
failing this would default the interest on the collateral trust bonds. 
The amount of surplus at the close of the fiscal year for the rail- 
road company was only $257,286, and for the Rock Island Company, 
$39,271. As the security on the collateral trust bonds was no better 
than on the dividend on the Railway stock, and the interest on the 
bonds only 4%, there was on the prices of 1906 but little temptation 
to convert the Railway stock. 

All the Railroad stock, as already noted, is owned by the Rock 
Island Company. 

The preferred stock of the Rock Island Company is entitled 
to 4% dividends, non-cumulative up to and including 1909, there" 
after at the rate of 5% to 1916, and after that at the rate of 6%. 
Furthermore the preferred stockholders are entitled to elect a 
majority of the board of directors, and the Rock Island board 
controls, of course absolutely, the Railway company. The re- 
sumption of dividends on the preferred stock depends entirely 
on whether the favorable results of 1906 continue to be shown. 
If they should this stock would tend to sell well up towards the 
full amount to which a 4% preferred is entitled, on account of the 
fact that the stock carries control of the system. It is to be noted 
however, that the railway company's charges, taxes and interest, 
have tended to increase more rapidly than the earnings, with the 
result that the surplus shown by the company on its stock was in 1905 
only about half of that shown the year of and the year preceding 
the reorganization. 

It follows naturally from this that the prospects for a divi- 
dend on the common stock in 1906 were remote, and inasmuch as 
the stock has no value for purposes of control, it represents noth- 
ing but possibilities. 

1905 and 1906 were for the Southwest and the territory cov- 
ered by the Rock Island lines, years of extraordinary prosper- 

40 



626 ROCK ISLAND 

ity, indicated by the opening of an enormous number of small 
banks and a great rise in farm values. In 1906 home-seeking ex- 
cursions on the Rock Island in one day carried 9,000 people. 
This has all the earmarks of the traditional "boom" which in 
years heretofore has preceded a drastic setback. Even in the 
flush year of 1906, fixed charges on the Rock Island consumed 
83% of the total net income. It will be seen that this road is not 
in as favorable a position to meet a possible depression as other 
roads like the Burlington, the North Western, etc., whose fixed 
charges consume considerably less than one-half of the available 
income. 



RUTLAND RAILROAD. 

The Rutland is mainly a Vermont line, operating a single- 
track road from Chatham, N. Y., and Bellows Falls, Vt., to the 
Canadian border and to Ogdensburg on the St. Lawrence River. 
It represents the reorganization in 1867 of the old Rutland and 
Burlington R. R., and the absorption of several small roads, in- 
cluding, since then, the Ogdensburg and Lake Champlain road. 
Under traffic agreements, the passenger trains of the company 
are run through to Montreal over the Quebec Southern and Cana- 
dian Pacific. At the beginning of 1905 the road passed definitely 
into the control of the New York Central, the latter having pur- 
chased a majority of the stock. Part of the old directorate re- 
signed, and New York Central directors were chosen in their 
stead. It is now officered by New York Central men, and is a 
part of the New York Central system. 

Capitalization. 

At the close of 1906 the capital account stood as follows : 

Common stock $199,400 

Preferred stock 9,057,600 

Total $9,257,000 

Funded debt 12,003,819 

Nominal capital $21,260,819 

Rentals cap. at 4% . 475,000 

Approx. gross capital $21,735,819 

Securities held 1,746,880 

Approximate net capital $19,988,939 

Approximate capitalization per mile $42,711 

Miles operated 468 

Net earnings on net capital 4.1% 

Stock on net capital 46% 

Fixed Charges on total net income 69% 

Factor of Safety 31% 

(627) 



628 



RUTLAND 



Considering the earnings, the capitalization is high, and the 
net earnings for 1906 showed only 4.1% on the estimated net 
capital, 

The stock represents 46% of the net capital. 

Fixed charges consumed 69% of the total net income, leaving 
a Factor of Safety for the securities of the road of only about 31%. 

The peculiar feature of the capitalization is that the old 
common stock has almost all been converted into preferred stock, 
at the rate of ten shares of common for one of preferred,' and this 
preferred stock is a cumulative 7% stock. As nothing like these 
dividends have been earned for years, the accumulated dividends 
amount to rather more than half again as much as the entire capi- 
tal stock, that is to say, to about 160%. These arrearages could 
only be paid by a stock or bond issue which would merely further 
dilute the capitalization. 

In ten years the mileage of the road has increased from 135 
to 415 miles and in addition to the latter figure, there are 52 miles 
of road operated under trackage rights. Within the same period 
the gross earnings have risen from $713,000 to $2,799,209 in 1906. 
That is to say, the gross earnings have just about increased with the 
mileage. 

Maintenance. 

The expenditures on maintenance for six and a half years 
show as follows : 



Year 


Traffic Density 


Maint( 


mance 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1905* 

1906 


406,730 
374,061 
377,486 
373,084 
428,980 
427,069 


$632 
634 
715 

728 
810 
966 


$520 
426 
566 
773 
703 
813 


$1,152 
1,060 
1,281 
1,501 
1,513 
1,779 






Average. . . . 


397,901 


$747 


$633 


$1,380 



*Fiscal year changed to calendar year. 

In 1901 new stock was sold to pay of! the floating debt and 
to provide for improvements ; $565,000 was credited to a special 
improvement fund and this, together with $217,000 more has 
been expended up to 1904. In 1903 all of the surplus was devoted 
to the same purpose; in 1904 $103,000; and the reports state that 
$77,000 was expended for improvements and charged to expenses 
during 1905, and $29,985 in 1906. 



RUTLAND 629 

The surplus earnings in 1906 amounted to $249,729 as against 
$290,847 the year before. From this $100,000 is applied annually 
for the redemption of equipment bonds, leaving a balance avail- 
able for the dividend in 1906 of $149,729, equal to about the \y 2 % 
dividend paid. 

Dividend Record. 

The road formerly paid dividends as follows : 

Year 1892-5 1896 1897 1898-9 1900 1901 1902 1903 

% 4 2 1 2 3 4 3 1 

In 1903 the dividends were suspended in order that all of the 
surplus earned might be devoted to improvements on the road, 
and this was followed through 1904. In 1905 a dividend of lj^% 
was declared and the same in 1906. 

Investment Value. 

The preferred stock is entitled to 7% cumulative dividends, 
and as this has not been earned the common stock can have no 
other value than for voting purposes. The surplus shown in 
1905 and 1906 did not hold out any large prospects for an in- 
crease of dividend. The preferred sold down as low as $30 a 
share in 1904, rising again to $72 a share in 1905. Except for the 
purpose of ensuring control, the stock is certainly very dear 
at the latter figure. On the basis of $33 a share, paying a lj^% 
dividend, it would yield to the investor 4^%, with a mild specu- 
lative chance of appreciation. It is a stock that is rather widely 
distributed, for so small a road, the company reporting over a 
thousand stockholders in 1905. This for the minority interest, 
would mean an average of less than $5,000 per shareholder. It is 
distinctively not the New York Central policy to declare high 
dividends, and under the control of the latter the policy of utilizing 
the larger part of the surplus for the improvement of the road will 
likely be continued. 



ST. LOUIS AND SAN FRANCISCO RAILROAD. 

The "Frisco," as it is commonly known, is, so far as its 
present lines run, curiously misnamed, since it does not extend to 
or towards San Francisco but lies southerly from St. Louis and 
Kansas City to the gulf, with a line reaching to Birmingham in 
Alabama. 

Since 1903 the Frisco has been a part of the Rock Island 
system, the Rock Island in that year acquiring almost the entire 
amount of outstanding common stock, and with it control of the 
road. In 1906 it operated 5,069 miles, the subsidiary Chicago & 
Eastern Illinois, and its subsidiary, the Evansville & Terre Haute 
lines being operated separately. All told, it controlled over 6,000 
miles of road, lying in eleven different states. 

History. 

The present St. Louis & San Francisco Railroad is a suc- 
cessor in 1896 of the Railway of the same name. The latter had 
been organized to build a Pacific line and in the wreck of the old 
Atlantic & Pacific took over a part of its lines running from St. 
Louis to Vinita. In 1882 Gould and Huntington obtained control- 
of the road simply with the idea of stopping further construction. 
They sold out to the Atchison, which took over control in 1890. 
In the Atchison collapse, the St. Louis & San Francisco itself 
went into the hands of receivers and was reorganized to form the 
present company, with 1,282 miles of road. Subsequently, by the 
lease or purchase of various small lines, the Kansas Midland, the 
Kansas City, Osceola & Southern, the Central division of the 
Atlantic & Pacific, etc., the mileage of the company was rapidly 
enlarged, and in 1901 the Kansas City, Fort Scott & Memphis 
and the Kansas City, Memphis & Birmingham lines were ac- 
quired, which, with various extensions has brought the system 
up to its present proportions. 

In 1905 all of the common and the larger part of the pre- 
ferred stock of the Chicago & Eastern Illionis was acquired, 
carrying with it control of the Evansville & Terre Haute and the 
Evansville & Indianapolis lines. 

(630) 



ST. LOUIS & SAN FRANCISCO 631 

Ownership. 

The executive committee of the Frisco is the same as that 
of the other associated companies in the Rock Island system and 
its directorate is very much the same, including in 1906 Wm. H. 
Moore, James H. Moore, D. G. Reid, chairman, B. F. Yoakum, 
chairman of the Executive Committee, A. J. Davidson, presi- 
dent, Robert Mather, first vice-president, Francis L. Hine, 
vice-president of the First National Bank, New York, H. Clay 
Pierce, president of the Pierce- Waters Oil Co., Wm. K. Bixby, 
James Campbell, Nathaniel Thayer, Benjamin P. Cheney and C. 
W. Hillard. 

For the $28,904,300 of common stock held by the Rock 
Island, that company paid per hundred dollar share, $60 in 5% 
Chicago, Rock Island & Pacific gold bonds, and an equal amount 
of Rock Island Company common stock. No dividends have 
ever been paid on the Frisco common stock, and the average 
price of the stock at the generally high level in the boom year 
of 1902 was about equal to the amount paid for the stock in gold 
bonds. The actual value of the Rock Island holdings is indi- 
cated in the analysis which follows. 

Capitalization. 

As of June 30th, 1906, the capital account of the St. Louis 
& San Francisco, proper, excluding the Chicago & Eastern Illi- 
nois, stood as follows : 

Common stock $ 29,000,000 

1st Pref 5,000,000 

2d Pref 16,000,000 

Total stock $ 50,000,000 

Funded debt St. L. & S. F 113,846,428 

Funded debt, K. C. F. S. & M 37,989,604 

Funded debt, Auxiliary lines (net) .... 16.170,420 

Guaranteed stock 13,510,000 

Equip. Trusts 7,512,325 

Chi. & East 111. Certificates 27,362,050 

Total capital $266,390,827 

Securities held 29,614,410 

Approx. net capitalization $236,776,417 



632 ST. LOUIS & SAN FRANCISCO 

Approx. net capital, per mile $46,710 

Average miles operated 5,069 

Net earnings on net capital 4.8% 

Stock on net capitalization 21% 

Fixed charges on total net income 82% 

Factor of safety 18% 

It will be seen that the capitalization for a Mississippi Val- 
ley line is high. The average of $46,710 compares with $49,790 
for the Illinois Central and $39,684 for the Louisville & Nash- 
ville ; and the mileage earnings of both these roads are about 
twice that of Frisco. The average capitalization of the Burling- 
ton, Chicago & North Western and the St. Paul roads is about 
$30,000 per mile and the average earnings of these roads is 50% 
above that of the Frisco. 

The fact of high capitalization is further illustrated in the 
percentage which the net earnings show on the net capital, the 
Frisco's 4.8%, comparing with 7.9% on the Illinois Central, 
8.9% on the Louisville & Nashville. 

It will be seen also that the percentage of fixed charges is 
high — far above the danger point for a Western road. Its 82% 
compares, for example, with 47% for the Illinois Central, 53% 
(after very high maintenance charges) for the Louisville and 
Nashville, and, to go further afield, 33% on the Union Pacific, 29% 
on the Northern Pacific, etc. 

By reference to the maintenance charges it will be seen 
further that the average maintenance charges of the Frisco are 
low, and were especially so in 1906, and that, had it been main- 
tained at something like the general level of other prosperous 
roads in this section, a considerable part of the surplus shown 
would have been wiped out, so that the actual margin of safety 
on the underlying securities was really much less than the nomi- 
nal 18% shown in 1906. 

It will likewise be noted that the larger part of this enor- 
mous capitalization is in bonds and that a very small per cent, 
is stock, the two having the rather unusual proportion of four 
to one. 

Equities Owned. 

The chief treasury holding was $7,217,800, par value of the 
common stock of the Chicago & Eastern Illinois, and $6,050,400 



ST. LOUIS & SAN FRANCISCO 633 

of the preferred stock. The $7,200,000 of common stock is car- 
ried on the books at a cost of $18,230,237 and the $6,000,000 of 
preferred at a cost of $9,321,550. These stocks were acquired 
in 1905, being exchanged for stock trust certificates of an equal 
par value. These certificates bore interest at the rate of 6% 
for the preferred and 10% for the common, and were redeemable 
up to 1942 at the rate of $250 for each share of common and $150 
for each share of preferred. Later, the larger part of the com- 
mon stock trust certificates were exchanged for others of a par 
value of $1,000, each representing the deposit of four shares of 
stock, and redeemable at par. The interest rate on these latter 
certificates is 4%, so that both income and principal were un- 
changed. 

In 1906 the Chicago & Eastern Illinois paid 6% on its pre- 
ferred stock and 8% on the common, so that on the common 
stock trust certificates the St. Louis & San Francisco was paying 
2% more in interest than it received in income on the stock. 
Further reference to the anaylsis of the Chicago & Eastern Illi- 
nois will show that its maintenance charges were very consid- 
erably below those of its competitors, to the extent of from $500 
to $900 per mile. Had the road charged itself not more than $500 
per mile additional for upkeep, this would have wiped out prac- 
tically the entire amount available for the common stock divi- 
dends, so that, practically speaking, the Frisco paid $250 per 
share in certificates and is paying 4% interest on this amount, 
for stock which, on equal maintenance with roads in the same 
territory, is scarcely earning any dividend at all. Even as it 
was, the payment of the 8% dividend on the C. E. I. common 
wiped out practically all the surplus for the year. It follows that 
the Frisco's equity in these holdings was a debit at least equal 
to 2% on the par value of the C. E. I. common stock, and actually 
much more than this if maintenance charges be considered. This 
was not a healthy situation for a road whose own fixed charges, 
after rather low maintenance charges, amounted in the tremen- 
dous boom year of 1906 to 82%. 

In this connection may be noted also the purchase of the 
Kansas City, Fort Scott & Memphis and the Kansas City, Mem- 
phis & Birmingham lines. These roads, now forming a part of 
the Frisco lines, are carried on the books at a valuation of 
around $81,000,000, and, actually, nearly $65,000,000 of bonds 
and guaranteed stocks are outstanding on these two lines, with 



634 



ST. LOUIS & SAN FRANCISCO 



a total of 1,200 miles of track. This is equivalent to a book 
valuation of nearly $70,000 per mile and the equivalent of a 
bonded debt in excess of $53,000 per mile. This latter is very 
nearly twice the total stock and bond capitalization of other 
Mississippi roads like the St. Paul, the North Western or the 
Burlington, all with very much higher mileage earnings. This 
is one of the items which help to explain the Frisco's 82% of 
fixed charges in 1906. 

Increase of Capitalization. 

Since June 30th, 1900, the amount of the company's stock 
outstanding has not been increased, while the funded debt was 
increased from $45,014,225 to $216,390,827. This was a total 
increase of capital of 180%. At the same time gross earnings 
rose from $7,983,246 to $32,046,656, or more than 400%. This 
is a very favorable showing, but if we disregard the $50,000,000 
of capital stock which probably represented little investment of 
actual capital and consider only the increase of funded debt, it 
will be seen that the latter increased by 470%, or more rapidly 
than earnings. 

Character of Traffic. 

Covering so broad a territory, the Frisco has naturally a 
diversified traffic. Of its total tonnage in 1906 about 20% was 
farm products, 12% manufactures, nearly 19% lumber,, and 
about 40% products of mines. The average earnings per ton 
mile are high, amounting to 1.0c. in 1905 and .95c. in 1906. 

Stability of Earnings. 

The following table exhibits the rapid increase of mileage 
and earnings in the eleven years under view : 



Year 



1895-6. 
1896-7. 
1897-8. 
1898-9. 
1899-0. 
1900-1. 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1950-6. 



Miles Operated 


Gross Earnings 


Per Mile 


1,163 


$6,059,372 


$5,210 


1,163 


5,993,336 


5,253 


1,221 


6,786,468 


5,640 


1,334 


7,226,662 


5,417 


1,400 


7,983,246 


5,702 


1,687 


10,173,697 


*6,032 


3,252 


21,620,882 


6,648 


3,675 


24,289,510 


6,609 


4,217 


26,896,731 


6,378 


5,030 


29,958,240 


5,955 


5,069 


32,046,656 


6,322 



* Includes Kansas City, Fort Scott & Memphis Railway, etc. 






ST. LOUIS & SAN FRANCISCO 



635 



It will be seen that the gross earnings per mile have risen 
very little within this period and actually were higher in 1903 
than in 1906, owing to extensions and the inclusion of new 
lines. 

Maintenance. 

Like the gross earnings, the traffic density of the line has 
in the six years from 1900 remained very nearly at a standstill. 
It was higher in 1902 than in any subsequent year. The follow- 
ing table exhibits the maintenance charges for the period : 



Year 


Traffic Density 


Maintenan 


ce per Mile 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


406,321 
503,553 
473,359 
456,012 
397,539 
454,969 


$781 
916 
935 
743 
714 
798 


$567 
H680 
|711 
^810 
1)701 

ik75i 


$1,348 
1,596 
1,646 
1,553 
1,415 
1,549 


Average. . . . 


448,625 


$814 


$703 


$1,517 


St. L. S. W... 

M. K. T 

K. C. Sou 

Atchison 

Rock Island. . . 


408,066 
495,226 
837,406 
577,005 
462,106 


1,023 
1,121 
961 
1,123 
1,022 


674 

616 

1,156 

1,113 

759 


1,697 
1,737 
2,117 
2,236 
1,787 



It will be seen that there has been practically no increase 
in the expenditures per mile in spite of the well-known' increase 
in the cost of labor and supplies, so that the road could scarcely 
have been as well maintained in 1906 as in previous years. 
Moreover, by comparison with other roads in the same section, 
it will be seen that the Frisco's charges were lower. Its 
average was more than $250 per mile less than the Rock Island, 
with about the same traffic density, more than $200 less per 
mile than the Missouri, Kansas & Texas, and very considerably 
below the Kansas City Southern or the Atchison, traffic den- 
sity compared. In 1906 this difference became still more accen- 
tuated. In that year the Frisco's charges were $400 per mile 
below the St. Louis & Southwestern, $350 below the Missouri, 
Kansas & Texas, about $400 below the Rock Island, and the 
difference between the Kansas City Southern and the Atchison 
was still greater. It seems safe to say that on the average the 
Frisco's charges were about $400 per mile for 1906 lower 
than other roads of the same character and in much the same 
territory, and this sum distributed over 5,000 miles of track 



636 



vST. LOUIS & SAN FRANCISCO 



is is very near 



would have been equivalent to $2,000,000. Th 
to the entire surplus shown for the year. 

Moreover, while other roads have turned back large sums 
from earnings each year into improvements, no such separate 
appropriations appear in the reports of the Frisco, although for 
the fiscal year of 1906 $1,789,393 of surplus earnings was carried 
to the credit of profit and loss. 

Surplus Earnings. 

On the basis of the maintenance .charges discussed above, 
the nominal surplus shown for the six years, from 1901, was as 
follows : 







Dividends 


Per cent 


[ Dividends 


Average 


Year 


Surplus 


paid on 1st 


earned on 


paid on 2nd 


price 2d 






Preferred 


2nd Prefer' d 


Preferred 


Preferred 


1900-1. . 


$1,809,856 


4 


10. 


3* 


81 


1901-2. . 


2,287,479* 


4 


13. 


4 


83 


1902-3.. 


1,474,717 


4 


7.9 


4 


78 


1903-4. . 


1,280,356 


4 


6.7 


4 


70 


1904-5.. 


1,024,128 


4 


5.1 


4 


74 


1905-6.. 


2,309,125 


4 


13.1 


2 


68 



* Includes Kansas City, Fort Scott & Memphis Railway. 

For 1906 the surplus shown was equivalent to the full 4% 
on both the first and second preferred stocks and to 5.0% on 
the common stock. Had maintenance charges been higher, this 
would have been an excellent showing. As it was, the showing 
was somewhat misleading. 

Dividend Record. 

The dividends on the stocks, both of the old company and 
the new since 1881, have compared as follows. 
Year. 1st Pfd. 

1881-6 7 

1887 7 

1888-9 7 

1890-6 

1897 2 

1898 4 

1898 4 

1899-0 4 

1901 4 

1902-6 4 



2d. Pfd. 



V/2 



1 

2 
2 

4 



In 1906 the dividend on the second preferred was passed. 






ST. LOUIS & SAN FRANCISCO 637 

The Balance Sheet. 

Included in the current assets of June 30th, 1906, were securi- 
ties in the treasury, carried at a cost of $849,778 and advances 
on account of construction of $954,295. Excluding these items 
and likewise the item of supplies on hand, in pursuance of the 
policy of this book, the sheet showed: 

Current Assets $7,769,025 

Current Liabilities 8,622,591 

Leaving a debit balance $ 853,566 

Even adding in the value of securities held in the treasury 

and the amounts advanced for construction, it will be seen that 

the company was not well off for working funds and that an issue 

of bonds or notes was obviously suggested. 

The amount of cash on hand amounted to $3,641,537, and 

the balance to credit of profit and loss was $3,470,978. 

Investment Value. 

Both the first and second preferred are entitled to a 4°/o non- 
cumulative dividend, and both these stocks are redeemable at par 
at the option of the company. The amount of first preferred is 
small— only $5,000,000— so that only $200,000 per annum is 
required for the full dividend on this stock. Nevertheless, the 
fact that the fixed charges, even after low maintenance, con- 
sumed so large a percentage of the total net income (82%), even 
in the prosperous year of 1906, tended very seriously to depress 
the value of this stock, and in the slump of March, 1907, it sold 
at $59 per share. This compared with a top price of $72 per 
share in 1906 and $90 per share in 1902. 

The amount of second preferred is more than three times 
that of the first. The passing of the dividend in 1906 tended to 
still further depress the price of this stock, and it fell to $34 per 
share in March, 1907.. This compared with a high point of $51 in 
1906 and $80 per share in 1902. 

Nominally, at least, the full 4% on the second preferred, as 
well as the first, was amply earned in 1906, and the passing of 
the dividend under the circumstances — that is, the company's 
need of working capital, was rather to the credit of the manage- 
ment than otherwise. But if in such a year of prosperity as 
1906 it was deemed unwise to pay a dividend, it was not very 
clear that a resumption of the dividend was in prospect. 



638 ST. LOUIS & SAN FRANCISCO 

The nominal surplus for the six years, on the basis of the 
rather low maintenance charges noted, was sufficient to leave about 
2% per annum for the common stock. On what ground the Rock 
Island was justified in paying $17,342,580 in 5% gold bonds, and an 
equal amount of Rock Island Company stock, or $120 per share, 
nominally, for stock then earning little or nothing, and earning 
little more since, is not very clear, especially as the interest on the 
bonds brought the Rock Island's fixed charges up to 83% in the 
phenomenally prosperous year of 1906. This purchase takes $867,- 
000 per year from the Rock Island's treasury, with scant prospects 
of any return for some years. In the four years, the sellers of this 
stock received over $3,000,000 in interest, where they otherwise 
would have received nothing. 

As for the underlying securities, it is obvious from the 
foregoing that the margin of safety on these was not large, and 
this fact tended greatly to depress their price. 



ST. LOUIS SOUTHWESTERN RAILWAY 

The St. Louis Southwestern, otherwise known as the "Cotton 
Belt Route," is one of the Gould lines that is not, however, an 
integral part of what is known as the Gould system. Its affiliations 
with the other Gould roads are naturally close, but it does not 
belong to the more immediate group of lines of which George Gould 
is the directing head. 

The road for many years belonged in the class that begins not 
much of anywhere, and pursued a devious path to a similar destina- 
tion. Its lines extended from southern Missouri across Arkansas 
into northeastern Texas. Of late years, however, the position of 
the road has been very materially improved, and in 1905 saw the 
completion of the new bridge, in which this company has a one- 
fifth proprietory interest, across the Mississippi — between Gray's 
Point, Missouri, and Thebes, Illinois. This gives the road access to 
St. Louis, through arrangements already made for the joint use of 
the Illinios division of the Iron Mountain road, for freight and 
passenger trains between Thebes and St. Louis. A short bit of 
road gives the line entrance into Memphis, and other traffic arrange- 
ments have carried its terminals to Sherman, Fort Worth, Dallas 
and other prosperous towns in Texas, and the line will eventually 
be carried to a Gulf terminal. 

All this is very strikingly different from the line which from 
1885 to 1890 was twice sold under foreclosure. The present road 
represents a reorganization in 1890 of the St. Louis, Arkansas and 
Texas. Three distinct companies were formed at the time: the 
present St. Louis Southwestern, the St. Louis Southwestern Railway 
Company of Texas, and the Tyler and Southeastern Railway Com- 
pany. In 1899 the latter road was absorbed by the Texas company, 
and the latter exsts as a separate organization merely to conform 
to Texas railway laws. The purchase of several small lines materi- 
ally increased the mileage and range of the road, bringing the total 
operated mileage in 1906 up to 1,452 miles. To this was added, in 
the fall of 1906, the Eastern Texas Railroad, a short line on which 
originates a heavy lumber traffic. 

(639) 



640 ST. LOUIS SOUTHWESTERN 

Ownership. 

The road has long been one of the Gould posessions, but its 
history within the last ten years has been one of steady upbuilding 
and extension, with no increase of capital stock, and a minimum 
issue of new securities. 

The make up of the board of directors is rather different from 
that of the other Gould roads, including Edwin Gould, president, 
and Howard Gould ; F. H. Britton, vice-president and general mana- 
ger, Winslow S. Pierce, general counsel, E. T. Jeffrey, president of 
the Denver and Rio Grande, R. M. Gallaway, president of the, 
Merchants' National Bank, New York, William H. Taylor, first 
vice-president of the Bowling Green Trust Company of which 
Edwin Gould is the president ; Murray Carleton and Tom Randolph, 
of St. Louis. 

The make up of the board of the St. Louis Southwestern Rail- 
way Company of Texas is again considerably different from that of 
the St. Louis Southwestern, although it is merely a formal organiza- 
tion. F. H. Britton is president and out of the nine directors, five 
are residents of Texas. 

Capitalization. 

The capital account on June 30th, 1906, stood as follows : 

Common stock $16,500,000 

Preferred stock 20,000,000 

Income bonds (4%) 3,260,500 

Total stock $39,760,500 

Funded debt (Inc. Income bonds) 38,972,750 

' Total capital $78,733,250 

Securities held 3,444,362 

Approx. net capital $75,288,888 

Approx. net capitalization per mile $51,910 

Average miles operated 1,452 

Net earnings on total capitalization 3.0% 

Stock on net capitalization 50% 

Fixed charges on net income 76% 

Factor of Safety 24% 



ST. LOUIS SOUTHWESTERN 641 

Under stock has been included $3,260,500 of non-cumulative, 
4% second mortgage income bond certificates, the remainder of 
the original issue of these bonds having been exchanged for first 
consolidated 4% mortgage. These bonds have, however, no voting 
rights. 

The amount paid in rentals is very small and has been neglected 
in the preceding estimate. It will be seen, that, as is character- 
istic of the Gould roads generally, the line is very heavily capitalized, 
the average per mile amounting to $51,910 on a road with net 
earnings of only a little over $6,000 per mile. This heavy capitaliza- 
tion is further reflected in the fact that in 1906 the net earnings 
represented only 3% on the net capitalization. Half of this capitali- 
zation, however, is represented by securities on which no dividends 
are paid. 

Nevertheless, even in the prosperous year of 1906, the interest 
on the Fixed Debt, etc. (not including income bonds) consumed 76% 
of the total net income, leaving a Factor of Safety for the underlying- 
securities of only 24%. This, for a road of the character of the 
St. Louis Southwestern is very low. 

The chief item of the securities held is $1,444,000 of the com- 
pany's own bonds, and the balance is mainly made up of small 
amounts of the stocks and bonds of subsidiary lines, the bridge 
company, etc. These securities represent no equities of value. 

The capital stock has not been increased since the reorganization 
of the road, and in five years the funded debt increased only a few 
millions, while the gross earnings have increased nearly 25%. This 
reflects the conservative and constructive policy which characterises 
the present management of the road. 

Character of Traffic. 

Farm products make up 20% of the tonnage, of which cotton 
is only 3%. The mine products are small. Lumber is heavy, 
this with forest products amounting to over one half of the total 
tonnage. Manufactures and miscellaneous make up the balance. 
An even two-thirds of the traffic of the road originates on its 
own lines. The revenue from passenger business amounts to less 
than 20% of the gross receipts. 

Stability of Earnings. 

The following table shows the steady growth in the earnings 
of the road, with no very great increase of capitalization: 

41 i 



642 



ST. LOUIS SOUTHWESTERN 



Year 



1896-7. 
1897-8. 
1898-9. 
1899-0. 
1900-1. 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 



Miles Operated 


Gross Earnings 


Per Mile 


1,223 


$4,743,546 


$3,878 


1,223 


5,279,332 


4,316 


1,250 


5,862,338 


4,690 


1,258 


5,908,284 


4,695 


1,275 


7,387,174 


5,791 


1,293 


7,267,259 


5,620 


1,291 


7,278,574 


5,635 


1,303 


7,649,485 


5,868 


1,418 


8,860,231 


6,248 


1,452 


8,989,564 


6,192 



It will be seen that the earnings per mile within these ten 
years have increased 66%, while the mileage has increased only 
about 15%. This increase has been steady, and there is every in- 
dication that it will continue. 

In the ten years under view the average revenue per ton-mile 
has declined very slightly. It was 1.13c. in 1897 and 1.07c. in 1905. 
For the year of 1906 there was a slight drop, to .98c. It will be 
seen that the average rate is high. 

Maintenance. 

From the following table it will be seen that while the traffic 
density has increased only about 30%, in the six years under view, 
the appropriations for maintenance have increased nearly 50%. 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


367,571 
398,254 
388,865 
390,010 
432,980 
470,720 


$847 
1,050 
1,103 
1,073 
933 
1,136 


$527 
634 
641 
748 
679 
812 


$1,374 
1,684 
1,744 
1,821 
1,612 
1,948 


Average. . . . 


408,066 


$1,023 


$674 


$1,697 


M. K. &T.. .. 
St. L. & S. F. . 
K. C. Sou 
Atchison 


495,226 
448,625 
837,406 
577,005 


1,121 
814 
961 

1,123 


616 

703 

1,156 

1,113 


1,737 
1,517 
2,117 
2,236 



Especially for 1906, these maintenance charges were undoubt- 
edly high, and reveal the policy of the management to build up 
the road as far as possible from earnings. Probably in the mainten- 
ance of way alone there was an excess charge amounting to more 
than $200,000 for the year. 

The equipment betterments were sufficient to allow $2,040 per 
locomotive, $635 per passenger car ; and $50 per freight car. This, 



ST. LOUIS SOUTHWESTERN 



643 



on a road of the traffic density of the St. Louis Southwestern was 
liberal and undoubtedly adequate. 

From the surplus earnings the following appropriations have 
been made within five years : 

1900-1 General improvements $1,490,000 

Equipment payments 258,825 

1901-2 " " 385,413 

1902-3 General improvements 54-4,765 

These amounts are small and have been superseded in later 
years by more liberal maintenance charges. 

Surplus Earnings. 

The surplus shown after Fixed Charges but before the payment 
of the interest on the income bonds, for the six years, has been 
as follows : 



Year 



1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



Surplus 



$1,813,799 

1,113,630 

694,834 

668,828 

1,174,242 

697,054 



Interest 

Paid on 

Income 

Bonds 



Per cent. 
Earned on 
Preferred 



7 
4.9 
2.8 
2.6 
5.2 
2.8 



Average 
Price 

(Calendar 
Year) 



33 
55 
67 
45 
43 
60 



Since 1901 the deductions for the interest on the income bonds 
has amounted to only about $130,000 per annum, but no dividends 
have been paid on the stock, and the surplus has been turned back 
into the improvement of the road. 

The Balance Sheet. 

At the close of the fiscal year of 1906 there were : 

Current assets and supplies on hand $4,110,855 

Current liabilities (including reserve fund) 2,630,201 



Leaving a working balance of $1,480,654 

The item of cash was $853,382 and the balance to the credit 
of Profit and Loss was $3,731,932. 

These statements were for the entire system. 



644 ST. LOUIS SOUTHWESTERN 

Investment Value. 

In his report to the president in 1906, Mr. Britton, the vice- 
president and general manager, observes that "it has been the 
policy of the management to induce and assist immigration into 
the territory contributory to the rails of the company, and to en- 
courage the location of new industries along the line. The results 
of this policy have been gratifying; thousands of acres of wild 
lands have been brought into cultivation and large numbers of the 
better class of farmers from the older states have located along 
the line, opening up and developing new sections which have here- 
tofore been untouched. This has been especially true of what is 
known as Saint Francis basin where by systematic drainage, thous- 
ands of acres of land have been reclaimed and cultivated. The 
demand for lumber also increased rapidly." 

It is evident from the analysis of earnings and maintenance 
that the road is under conservative management, and that its 
securities have been steadily growing in value. The small items 
of surplus shown, especially in 1906, are the result of the liberal 
maintenance and it would not have been difficult for the manage- 
ment to have skimped these sums in order to pay at least some 
dividends on the preferred stock. 

If the earnings of the road continue to increase in the same 
favorable fashion, it should not be long before the preferred stock 
is receiving a dividend. The amount of this stock relative to the 
common is large, and the full 5% on this stock would consume 
$1,000,000 annually. If there be no necessity for a still further in- 
crease in the maintenance charges, and earnings keep up, at least 
2% might be paid upon this stock conservatively. 

Its prices have reflected this possibility. It sold as low as $22 
per share in 1900, and under the favorable showing of 1902 it was 
run up to $80 per share. It declined to $24 in 1903, rising again 
to $66 in 1905. The average price in 1906 was around $55 per 
share. 

A stock with these figures, and the possibilities indicated, does 
not present a particularly attractive investment. On a 2% basis it 
would scarcely be worth more than $50 per share, since in any 
event it is limited to 5%. If, however, a considerable recession in 
prices should come, at from $30 to $35 per share it would probably 
show a fair return to the investor who was content to put it by in 
his strong box. 



ST. LOUIS '" SOUTHWESTERN 645 

As to the common it is difficult to see that it has any value at 
the present time, except as a plaything for the stock market. It sold 
down below $10 per share in 1904, declining to that from $39 per 
share in 1902. It rose again to $27 in 1905. 

It belongs to that class of non-dividend paying stocks which 
fluctuate widely in value, and if purchased at a nominal price, like 
$10 or $12 a share, is likely to show its holders a handsome 
profit on the investment, when the market turns upward. It is 
probable that the Gould interests hold sufficient quantity of the stock 
so that control of the road could not be picked up in the market, 
and if this be true, the stock has no other value than that which 
would be justified by its earnings and prospects. 



SEABOARD AIR LINE RAILWAY. 

The Seaboard Air Line is the smallest of the three important 
railway systems which practically dominate the transportation of the 
eastern southern states. It operates directly a total of about 2,600 
miles extending from Richmond and Norfolk on the north through 
Savannah to Tampa on the Gulf, with important cross lines reach- 
ing from Wilmington on the coast through Atlanta to Birmingham 
and Bessemer, and another from Savannah through Montgomery, 
Ala. It also owns the Atlanta and Birmingham Air Line, which, 
with 17 miles of trackage rights, operates 228 miles, and the Florida 
West Shore, operating 69 miles ; and in 1906, it acquired control 
of the Macon, Dublin and Savannah. 

The present company was organized in 1900 as successor to the 
Richmond, Petersburg and Carolina Railroad, owning a line from 
Richmond, Va., to Norlina, N. C, and representing a consolidation 
of the old Seaboard Air Line system with the Georgia and Alabama, 
the Florida Central and Peninsular, and the Atlantic, Suwanee and 
Gulf. The original Seaboard Air Line was in its turn a consolida- 
tion of the old Seaboard and Roanoke, opened in 1835, and re-built 
in 1851, with several smaller roads. The Seaboard practically 
parallels the Atlantic Coast Line throughout its main length, and 
runs through a rich cotton district and by its extensions reaches into 
the manufacturing districts of northern Alabama. 

The consolidation was carried out principally by John L. Wil- 
liams and Sons, of Richmond, Va., and Middendorf, Oliver and Co., 
of Baltimore, at that time the principal owners of the Georgia and 
Alabama railway. Subsequent to this the Williams interests lost 
control of the road, and considerable changes were made in the 
directorate and management. 

In 1906 the board of directors consisted of Thomas F. Ryan, 
vice-president of the Morton Trust Company of New York, also a 
director in the Hocking Valley, the Pere Marquette and several 
industrial enterprises ; James A. Blair, of Blair and Company, bank- 
ers, New York ; H. Rieman Duval, also a director in the Atchison ; 
S. Davies Warfield, of Baltimore, also a director in the Missouri 

(646) 



SEABOARD AIR LINE 647 

Pacific ; Y. Van den Berg, formerly vice-president of the Louisville 
and Nashville, now associated with Ladenburg, Thalmann and Co., 
bankers, New York ; Ernst Thalmann, of the same firm ; Norman 
B. Ream, also a director in the Baltimore and Ohio, the Erie and 
other roads ; H. Clay Pierce, of the Waters-Pierce Oil Company, 
now a part of Standard Oil ; B. F. Yoakum, chairman of the board 
of the Rock Island system, also a director in the St. Louis, Mem- 
phis and Southeastern, which meets the lines of the Seaboard at 
Birmingham ; T. Jefferson Coolidge, Jr. ; C. Sidney Shepard, of 
New Haven ; George W. Watts, Durham, N. C. ; James H. Dooley, 
Richmond, Ya., Townsend Scott, Baltimore ; and N. S. Meldrum, 
New York, vice-president. 

The executive committee of 1906 consisted of James A. Blair, 
Thomas F. Ryan, S. Davies Warfield, Thomas Jefferson Coolidge, 
Jr., B. F. Yoakum, Ernst Thalmann, and C. E. Shepard. 

In a circular issued in 1900 Messrs. Williams and Sons stated 
that the stock was distributed among 1,100 stockholders mainly of 
southern residence. 

The larger part of the stock of the Seaboard has been acquired 
by the Seaboard Company, a holding organization incorporated in 
1905 to provide for the liquidation of the floating debt of the rail- 
way, for improvements, extensions, etc. 

Seaboard Company. 

The authorized capital of the holding company is $36,000,000 
of common stock, $18,000,000 each of first and second preferred. 
At the close of 1906 the following amounts of this stock had been 
issued : 

Common $28,545,755 

First preferred 6,360,600 

Second preferred 15,993,650 

At the close of 1906 about 82^% of the stock of the railway 
company had been exchanged for stock of the holding company, the 
dissenting stock of about $10,000,000 par value being held by a 
minority interest represented by Middendorf, Oliver & Co., and 
John L. Williams & Sons. The basis of the exchange was as 
follows : 

Each holder of one share of preferred stock of the railway 
company upon payment of $12.50 cash received $12.50 in first pre- 
ferred, $75 in second preferred and $12.50. in common stock. 



648 SEABOARD AIR LINE 

For each share of common stock upon payment of $12.50 cash, 
the holder received $12.50 of first preferred and $87.50 in common. 

Those subscribing to the new stock and making no payment in 
cash received $75 of second preferred of the new company for 
each share of the old preferred and holders of the common received 
$75 in the common stock of the new company. 

Of the cash capital provided by the formation of the holding 
company $4,440,900 up to June 30th, 1906, had been loaned to the 
Railway company and stood upon the books of the latter as notes 
payable. 

Capitalization. 

(Seaboard Railway.) 

Excluding the small amount of capital stock held in the treas- 
ury, a leasehold interest in the Wilmington Railway bridge, carried 
at $108,500, and the $5,760,000 of Seaboard Air Line Atlanta-Bir- 
mingham first mortgage bonds (against which an equal amount of 
first mortgage bonds of the Atlanta & Birmingham Air Line bonds 
were held in the treasury), the capitalization of the system on June 
30th, 1906, stood as follows : 

Common stock (net) $37,009,000 

Preferred stock (net) 23,895,000 

Total stock $60,904,000 

Funded debt 57,840,000 

Equipment trust 5,440,068 

Notes 4,440,900 

Total capital $128,624,968 

Securities held 4,724,687 

Approx. net capitalization $123,900,281 

Approx. net capital, per mile $47,453 

Average miles operated 2,611 

Net earnings on net capitalization 3.7% 

Stock on net capitalization 49% 

Fixed charges on total net income 78% 

Factor of safety 22% 

The rentals paid by the Seaboard were small and about bal- 
anced by the rentals received. The amount of securities held was 



SEABOARD AIR LINE 649 

likewise small and subtracted but little from the gross capitalization 
of the road. 

It will be seen that for a road earning less than $6,000 a mile, 
the capitalization of the Seaboard system, like that of the Southern 
Railway, is high; its $47,453 per mile compares with $49,223 for 
the Southern Railway; with $28,403 for the Atlantic Coast, and 
$39,684 for the Louisville and Nashville, which latter, for example, 
earns $10,400 per mile gross. 

The gross earnings of the Southern Railway in 1906 amounted 
to $7,274 per mile as against $5,709 for the Seaboard, showing 
that the capitalization of the Seaboard, as compared with gross 
earnings, is higher even than that of the Southern. This fact is 
further evidenced by the comparison of the net earnings with the 
ret capitalization, the net earnings of the Seaboard showing in 1906 
3.7%, as compared with 4.2% for the Southern Railway, 7.1% 
for the Atlantic Coast, and 8.9% for the Louisville and Nashville. 

The capitalization of the Seaboard, like the Southern, is, earn- 
ings compared, at least twice as high as that of standard western 
roads, like the St. Paul, the Burlington, and the North Western. 
These latter roads, with higher gross earnings, are capitalized at an 
average of about $30,000 per mile. 

It will be seen from the table given above that the stock of the 
road represents one-half of the net capitalization and on this stock 
no dividends are being paid. 

The bonded debt of the road as compared with its earnings is 
high ; and Fixed Charges in the prosperous year of 1906 consumed 
78% of the total net income, leaving a Factor of Safety for the 
underlying securities of only 22%. This is very low and compares 
with a similar factor of safety of from 50% to 60% on such roads 
as the Pennsylvania, the Baltimore and Ohio and other standard 
lines. This is one of the handicaps which militate greatly against 
the development of the road. 

Equities Owned. 

The Seaboard Air Line has a one-sixth interest in the joint 
Richmond-Washington Company, and has a traffic arrangement 
with the Pennsylvania by which it maintains through car service 
to the South. It also owns the Baltimore Steam Packet Company, 
unbonded, and has a substantial interest in the Old Dominion Steam- 
ship Company. The surplus earnings of the water lines in 1906 
were $139,457. 



650 



SEABOARD AIR LINE 



As of June 30th, 1906, the Seaboard 'held in its treasury $5,- 
760,000 first mortgage bonds of the Atlanta and Birmingham Rail- 
way Company, held as security for an equal amount of bonds issued 
by the Seaboard. This amount was devoted to the construction of 
the Atlanta and Birmingham line. 

In addition to the bonds so issued on the same date there was 
due to the Seaboard as advances to the Atlanta and Birmingham 
line, $4,063,830, partly secured by second mortgage. 

The Atlanta and Birmingham in 1906 barely paid its operating 
expenses and taxes, so that the $230,416 interest on the first mort- 
gage bonds had to be met by the Seaboard, but this amount was not 
charged to Seaboard income but carried in open account with the 
Atlanta and Birmingham line as additional indebtedness. The Sea- 
board also guarantees the principal and interest of the Florida and 
West Shore, which showed a deficit for the year over all charges of 
$9,500, which brought up the amount due to the Seaboard to 
$84,286. 

Altogether the amount of outside holdings of the company is 
small, and its equities in any of these holdings would add but little 
to the income of the road. 

Increase of Capitalization. 

From the close of the first full year of the consolidated com- 
pany's operations to 1906 the increase of capitalization and earn- 
ings was as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 


Gross 
Earnings 


1901... 
1906. . . 


$29,000,000" 
37,009, 000J 


$19,400,000 
23,895,000 


■$54,948,912 
67,720,968 


!$102, 989,912 
128,624,968 


$10,426,279 
15,116,947 



Increase over 5 years : Total capital, 25% ; gross earnings, 45%. 

It will be seen that by adding one-quarter of its total capital 
obligations, the road was able to increase its gross earnings by 
nearly one-half. This is an admirable showing and had the road 
been less heavily handicapped with debt at the beginning, it would 
now be in excellent shape. 

In January, 1907, a new issue was authorized of $18,000,000 
of 30-year 5% bonds to be secured by a mortgage and collateral 
trust agreements covering (subject to existing liens) all the rail- 
way property and such securities as may be deemed advisable. Of 



SEABOARD AIR LINE 



651 



these bonds $7,308,000 were offered to the stockholders pro rata at 

90, to provide for debt incurred for improvements and extensions. 

In May of 1907, $1,300,000 equipment trust notes were sold. 

Character of Traffic. 

Products of agriculture made up 15% of the total tonnage for 
1906, of which cotton contributed 3^2%, products of mines 13%, 
forest products 35%, and manufactures and miscellaneous 35%. 
The largest single item in the traffic of the road was lumber and 
staves which amounted to 23%, or nearly one-quarter. Passenger 
earnings contributed 21% of the gross earnings of the road. 

Stability of Earnings. 

The following figures taken from Mr. Mundy's "Earning 
Power of Railroads," show the mileage and earnings of the system 
both prior to its consolidation and subsequently. Previous to July 
1st, 1900, the Seaboard Air Line comprised 961 miles, the Florida 
Central and Peninsular 940 miles, and the Georgia and Alabama 
458 miles. 



Year 



1895 . . 

1896 . . 

1897 . . 

1898 . . 

1899 . . 

1900 . . 
1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



Miles Operated 


Gross Earnings 


Per Mile 


2,185 


$ 5,585,832 


$2,566 


2,225 


6,034,083 


2,712 


2,293 


6,901,286 


3,009 


2,349 


7,458,274 


3,175 


2,359 


8,559,532 


3,628 


2,359 


8,980,322 


3,806 


2,592 


10,426,279 


4,022 


2,604 


11,068,478 


4,250 


2,607 


12,156,928 


4,663 


2,611 


12,750,271 


4,883 


2,611 


13,619,274 


5,216 


2,611 


15,116,947 


5,790 



It will be seen from the above that in the six years prior to the 
consolidation, earnings per mile had increased from $2,566 to 
$3,806, or more than 50%. From the first year of the consolidation 
(1901) the earnings increased from $4,022 per mile to $5,790 per 
mile in 1906, an increase of 42% in five years. The increase in 
mileage earnings then, since the consolidation, was slightly less 
rapid than previously. The increase in mileage earnings for the 
twelve years under view was over $3,200 per mile or about 125%. 
This is an average increase of 10% per year. 

It is to be noted that the average rate per ton per mile received 
by the Seaboard is high, amounting in 1905 to 1,18c. and in 1906 



652 



SEABOARD AIR LINE 



to 1.12c, which compares with 1.13c. for the Atlantic Coast Line, 
.93c. for the Southern, and .47c. for the Norfolk and Western. This 
is due in part to the character of the freight carried and in part to 
the fact that in its special territory the Seaboard 'has little compe- 
tition. 

Maintenance. 

The traffic density and maintenance items for the six years of 
the operations of the consolidated company were as follows: 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


236,465 
284,285 
296,061 
296,630 
311,586 
368,269 


$538 
492 
569 
642 
693 
714 


$476 
418 
556 
676 
663 
746 


$1,014 
900 
1,125 
1,318 
1,356 
1,460 


Average. . . . 


311,366 


$620 


$611 


$1,231 


Atl. Coast .... 

So. Ry 

L. &N 

Cent, of Ga . . . 


259,769 
435,987 
929,594 
303,245 


709 

860 

1,490 

890 


556 

964 

1,537 

722 


1,265 
1,842 
3,027 
1,612 



It will be seen that in the period under view traffic density in- 
creased about 50% and the average maintenance of way per mile 
about 35%. The increase of equipment maintenance was heavier, 
rising from $476 per mile in 1901 to $746 in 1906, an increase of 
about 60%. The increase of total maintenance per mile was 
about 40% or about the same as the increase of traffic density, so 
that the road should have been rather better maintained in 1906 
than in 1901. Compared with the Southern Railway it will be seen 
that with an average traffic density for the six years one-quarter 
less than that of the Southern, the average expenditures for mainte- 
nance of all sorts were one-third less. Compared with the Atlantic 
Coast Line, the average maintenance for six years was slightly less, 
on a somewhat higher average density. 

It seems fairly obvious from the above comparisons that no 
earnings were concealed in maintenance. 



Surplus Earnings. 

The nominal surplus shown after all charges since the consoli- 
dation were as follows: 



SEABOARD AIR LINE 



653 



Year 




Per cent 
Earned on 
Preferred 



1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



I 329,659 

820,254 

832,481 

382,825 

1,171,908 

1,131,578 



1.6 
4.2 
4.2 
1.6 
4.9 
4.7 



It is to be noted that the surplus shown in 1906 did not include 
the loss from the operations of the Atlanta and Birmingham line nor 
of the Florida and West Shore. The combined loss on these two 
roads for the year was $238,953. Deducting this amount from the 
nominal surplus shown left an actual surplus for the year of only 
$892,624. This, after an increase during the year of more than 
10% in the gross earnings was a disappointing showing, and refer- 
ence to the table of maintenance charges will show that it was not 
due to a heavy increase in these items. 

Operating expenses for the year rose from 66.7% in 1905 to 
69.5% in 1906. Of the $1,421,000 added operating expenses for 
the year, $1,127,000 was due to an increased cost of transportation. 
This resulted from an increase in wages, in the cost of fuel, and loss 
by wreckage. The amounts paid for car mileage, which may be 
assumed to be the rent of foreign equipment, was high, and higher 
even than the previous year, amounting to $253,313 in 1906, and 
this was in the face of the receipt of 1,100 new cars of large ca- 
pacity during the year. 

The operations of the Birmingham and Alabama line were 
rather astonishing. The gross earnings for 1906 amounted to 
$836,533, or average earnings of $3,230 per mile. The operating 
expenses for the year, taxes and rentals included, were 100%. No 
explanation for this curious result is given by the report. Had the 
Birmingham line been operated on the same basis as the rest of the 
system, about 70%, it would have s'hown a surplus of about $250,- 
000, or sufficient to pay the full interest on its first mortgage bonds 
and relieve the company of the deficit of the same sum which was 
shown for the year. This was an item on which the stockholders 
of the road would doubtless have enjoyed more light. 

The Balance Sheet. 

In the balance sheet at the close of the fiscal year of July 30, 
1906, there was an item of notes receivable to the amount of $1,075,- 



654 SEABOARD AIR LINE 

996. Similarly there were in the items of current liabilities notes pay- 
able to the amount of $4,409,900, which latter amount has already 
been included in the capital indebtedness of the road. Including the 
notes payable in the current assets, but excluding the same item 
from the current liabilities, 

Current assets showed $3,992,342 

and Current liabilities 3,735,436 

leaving an apparent working balance of $256,906 

The report further shows items of "Provisional Accounts" (lia- 
bilities) to the amount of $3,612,150 additional. The larger part 
of this was the amount due to proprietary companies of $2,171,442. 
Against these items were deferred assets amounting to $4,609,788, 
of which the larger part was $4,063,830 advanced to the Atlanta 
and Birmingham Air Line. 

Should the operations of the Birmingham line be successful, 
and it ought to be able to earn not only the interest on its first 
mortgage bonds, but its debt to the Seaboard Air Line likewise, the 
liabilities of the company would not appear so formidable. But all 
this complicated arrangement of accounts was offered to the share- 
holders without a word of explanation of any sort. 

The various items of cash amounted to $1,604,117. The work- 
ing balance shown even under the favorable arrangement given 
above was very small, and so far as the report indicates, the com- 
pany did not seem very well situated for the conduct of its current 
affairs. 

Investment Value. 

The affairs of the Seaboard in 1907 were in such complicated 
shape, and the amount of information supplied by its reports and 
otherwise, so limited as to make it scarcely worth while to attempt 
to estimate the value of its securities. 

For the first nine months of the fiscal year of 1906-7 gross 
earnings showed an increase of a little over 8%, but operating ex- 
penses were so heavy that the net had declined by more than $1,- 
000,000 from the previous year. At the same time fixed charges 
had considerably increased, so that in lieu of a surplus of nearly 
$1,000,000 shown during the same period of the previous year, the 
operations of the company showed a deficit of nearly $350,000. The 
same heavy rise in operating expenses had been shown by the 
Southern Railway, and in a lesser degree by the Atlantic Coast Line. 



SEABOARD AIR LlNfi 655 

It was evident from the above that unless a radical change took 
place the company would be forced to a reorganization, in which 
case the outstanding stock of the railway would be of little value. 
In circulars issued by John Skelton Williams of Richmond it was 
charged that the road had been "shamefully mismanaged" and that 
it was the purpose of the Blair-Ryan management to freeze out the 
minority holders. 

Seaboard Company. 

The first preferred stock of the Seaboard Company is entitled 
to 5% dividends, and is preferred both as to principal and dividends, 
and after July 1st, 1910, the dividend is cumulative, but the stock 
is redeemable at the option of the company after July 1st, 1908, and 
is convertible at the option of the holder into second preferred stock 
at par. 

The second preferred is entitled to 6% non-cumulative divi- 
dends and is redeemable at the option of the company at 110 after 
July 1st, 1908, providing the first preferred shall have been redeemed 
or converted. 

All classes of stock have full voting power. 

On the outstanding preferred stock, $6,360,600, 2^ % dividends 
were paid in July, 1906, and in January, 1907. 

It will be seen from the above that as the railway company 
earned a deficit for the fiscal year of 1906-7, the only income de- 
rivable by the holding company was from interest on bonds and 
loans, and that the earnings of the railway were insufficient to meet 
these charges in full. 



SOUTHERN PACIFIC COMPANY. 

The Southern Pacific Company operates the longest line of 
rails covered by any single company in the world, though the 
difference between it and the Atchison or Canadian Pacific is not 
great, and its gross income is second only to that of the Penn- 
sylvania. This income for 1906, including receipts from the land 
department, exceeded $110,000,000. Nevertheless, it is to all in- 
tents a subsidiary part of the Union Pacific-Southern Pacific sys- 
tem. This is true, not merely with regard to the Union Pacific's 
ownership of what amounts to practical control, but as to actual 
management. Its chief operating officers are the same as those 
of the Union Pacific, and in two of the sectional divisions into 
which the combined system is divided for operating purposes, 
parts of both the two companies' rails are included. In other 
words, for operating purposes the two companies are practically 
a unit. 

The lines of the company extend from San Francisco north- 
ward to Portland, in Oregon, eastward to Ogden, in Utah, and 
southward through Southern California, Arizona, New Mexico 
and Texas to New Orleans. In 1906 the system embraced an 
average of 9,191 miles. 

In addition to this, the Southern Pacific operates an import- 
ant line of steamships from the Gulf of Mexico up the Atlantic 
coast, and owns a majority interest in the Pacific Mail Steamship 
Company, operating between San Francisco, Panama and the 
Orient. The company has also considerable interest in the Cali- 
fornian oil fields and electric roads in that State. 

The Southern Pacific Co. owns no track in fee, but partly 
through leases, partly through ownership of stock, controls the 
great system of rail and steamship lines, whose earnings are in- 
cluded in its report. 

History. 

The beginning of the present Southern Pacific was the 
Central Pacific, and the collateral Western Pacific, chartered by 

(656) 



SOUTHERN PACIFIC 657 

act of Congress in 1862, simultaneously with the Union Pacific. 
The Western Pacific was to build from Oakland, opposite San 
Francisco to Sacramento, and the Central Pacific eastward from 
there to join the lines of the Union Pacific wherever they should 
meet. 

It is said that the builders of the Central Pacific, Messrs. 
Crocker, Huntington and Stanford, began with less Ithan a 
quarter of a million capital between them upon a work whose 
estimated cost was $58,000,000. They obtained loans from Sacra- 
mento and Placer counties in California, and with this built 
enough road to begin to draw on the heavy subsidies offered by 
the National Government, which were the same as those of the 
Union Pacific. Shortly after, the Central and Western Pacific 
were amalgamated and several smaller lines radiating from San 
Francisco were later absorbed. It then leased the Southern 
Pacific with 1,229 miles of track and thus gained control of 
practically the entire transportation system of California. From 
1873 to 1883 the Central Pacific was prosperous and for a time 
paid good dividends. In 1884, however, the Southern Pacific 
Company was formed as a Kentucky corporation, taking over by 
lease the Southern Pacific, the Central Pacific and their subsidi- 
ary lines. By this means the road escaped the direct control of 
California law and likewise enabled its ingenious inventors, so it 
was charged, to transfer the profits of the Central Pacific to the 
new Southern Pacific; that is to say, to themselves. 

The road eventually came under practically the single domi- 
nation of Mr. Huntington, who designed it to form a part, with 
the Chesapeake & Ohio and intermediary lines, of a complete trans- 
continental system and for a time it was so operated. This was 
the first true transcontinental road in the United States. 

In 1901 Mr. Huntington died, and his and allied interests 
in the road were sold to the Union Pacific under Mr. Harriman's 
domination, and since that time it has been a Harriman road. 

The absorption in 1898 of the Houston & Texas Central and 
allied lines gave the road a large mileage in Texas and made it 
the most important single road in that State. 

The Southern Pacific Company was at the time of its 
organization enormously over-capitalized, but large sums have 
been taken annually from its earnings for improvements, both 
before the Harriman regime and especially since, so that the 
Company has gradually "grown up" to its capitalization, and 

42 i I 



658 SOUTHERN PACIFIC 

its net earnings now represent a very respectable percentage on 
the total of stocks and bonds. No dividends were ever paid on 
the common stock until 1906. 

Ownership. 

As of June 30th, 1906, the Union Pacific owned $90,000,000 
par value out of about $198,000,000 of the common stock, and 
$18,000,000 par value out of about $39,000,000, par value of the 
preferred. While this $108,000,000 of Union Pacific stock does 
not represent a majority interest, it amounts practically to that, 
and it is not improbable that interests friendly to the Union 
Pacific own more than enough to make the control absolute. 

The number of shareholders is comparatively small, the road 
reporting only 2,424 stockholders in 1905, as against 17,523 for 
the Atchison and 14,256 for the Union Pacific. 

The directorate of 1906 included E. H. Harriman, president; 
Wm. D. Cornish, vice-president; Robert S. Lovett, James Stillman, 
David Willcox, president of the Delaware & Hudson; Marvin 
Hughitt, president of the North Western, all directors in the Union 
Pacific ; Maxwell Evarts, attorney of both roads, and W. V. S. 
Thorne, director of purchases, both directors in the Oregon 
Shortline; A. K. Van Deventer, assistant treasurer, and Henry 
W. De Forest, closely associated with Mr. Harriman. These 
make up a considerable majority of the board. The other direc- 
tors were Robert Goelet, of Newport, R. I. ; H. E. Huntington, 
very largely interested in local traction matters in Southern 
California; Clarence H. Mackay, of New York, the head of the 
Mackay Companies, the Postal Telegraph, etc. ; D. O. Mills 
and Ogden Mills, New York. 

The executive committee of 1906 was made up of Messrs. 
Harriman, De Forest, Stillman, Lovett and Willcox; three of 
these are also members of the executive committee of the Union 
Pacific. 

The affiliations of the Southern Pacific are naturally those 
of the Harriman interests. 

Capitalization. 

The Southern Pacific Company, whose shares are dealt in on 
the exchanges, is a holding company — a Kentucky corporation 
which owns the entire capital stock of the Southern Pacific, 
Central Pacific and the numerous other roads, all grouped to- 



SOUTHERN PACIFIC 659 

gether as the "Proprietary Companies." The capitalization of 
the consolidated system, June 30, 1906, stood as follows : 

Common stock $197,849,258 

Preferred stock 39,569,840 

Total stock $237,419,098 

Funded Debt (net) 354,737,321 

Total capital $592,156,419 

Approximate capital per mile $64,426 

Average miles operated 9,191 

Net earnings on total capital. . •. 6.6% 

Stock on total capitalization 40% 

Fixed charges on total net income 49% 

Factor of safety 51% 

The funded debt shown above is the total amount of the 
outstanding securities of the system, less the amount held in sink- 
ing funds, $13,936,000, and about two and one-half millions dol- 
lars of stocks and bonds held in the treasury. This amount 
includes the item of $17,643,814, the balance of the notes issued 
to the United States Government, in settlement of the Central 
Pacific's indebtedness. The item of securities held is passed by, 
owing to the difficulty of determining the value of the securities 
held. This item is further discussed unddr (the subject bf 
"Equities Owned." It might reduce the gross capitalization of 
the company by a matter of $25,000,000, more or less, that is to 
say, not much to exceed 5%. It follows that the figures as to 
capitalization per mile is the gross capitalization, but this would 
not differ very greatly from the amount if the value of outside 
securities had been deducted. 

The figure of $64,426, gross capital per mile, compares with 
a similar estimate of $58,887, net capital for the Atchison; $59,512 
net capital for the Northern Pacific ; $42,362 for the Great North- 
ern, and $28,613 for the Canadian Pacific. Reference to the 
analysis will show that the nominal net capital per mile of the 
Union Pacific is $73,992. But if the market value of its securi- 
ties be deducted, its net capitalization would actually be not much 
above $50,000 per mile. 

On the basis of its earnings in 1906 the capitalization of the 



660 SOUTHERN PACIFIC 

Southern Pacific compares favorably with that of the Atchison, 
its showing of 6.6% net earnings on total capital standing against 
5.9% net earnings on total capital for the Atchison. Both these 
figures, however, are very much below that of the other Pacific 
companies, that of the Union Pacific being nominally 8.0%, the 
Northern Pacific 9.6% the Great Northern 10.1%, Canadian Pacific 
9.4%. 

The larger part of the capitalization is in the form of bonds, 
stock representing only 40% of the total. 

On the other hand, in 1906 fixed charges consumed only 
half the nominal total net income (actually not over 40%), leav- 
ing an ample margin of safety for its underlying securities. 

Equities Owned. 

Unlike the Union Pacific, the Southern Pacific is not a large 
holding corporation, in the sense of holding large amounts of 
outstanding securities. Outside of the stocks and bonds of its 
"Proprietary Companies," that is, companies included in the 
operations of the system, it owns a total of $63,483,243, face value 
of the capital stocks of other companies, and $5,228,300 of out- 
side bonds. The amount at which these outside holdings are 
carried on the books of the Company is not separately stated. The 
chief items are : 

Pacific Mail Steamship Company, $10,010,000 (a bare ma- 
jority in the capital stock). 

Pacific Electric Ry Co., $10,000,000 (par value, constituting 
an even half interest). 

San Francisco & No. Pacific RR. Co., $5,590,000 ( par value, 
very closely the entire amount outstanding). 

North Shore RR. Co., $5,980,400 (practically the entire 
issue). 

Mexican International, $4,172,100 (a small minority). 

Stocks of Oil Companies, $17,008,436 (value not indicated). 

In 1906 the Southern Pacific received in dividends from 
these stocks $372,668, but this would probably not indicate in 
any way the market value of these securities. For example, the 
Pacific Mail pays no dividends, but control of this large steam- 
ship company is undoubtedly of great value to the Southern Pa- 
cific RR. Most of the other securities, aside from the stocks 
of the oil companies and electric railways, are stocks of small 
roads which will eventually be merged into the system. 



SOUTHERN PACIFIC 



661 



In addition to the above, the Southern Pacific, or its constitu- 
ent companies, had in 1906 a total of 15,000,000 acres of unsold 
land. On the lands sold during the year the price averaged 
was $2.73 per acre. It would be difficult to give a general valua- 
tion to this asset, but on the basis of the average price of 1906 
it might readily exceed $25,000,000 or $30,000,000. 

Increase of Capitalization. 

In the six years from 1900 the capitalization of the system 
was not greatly increased, the amount of common stock remain- 
ing practically the same. The principal items of increase, as will 
be seen from the following table, were the issue of a little 
less than $40,000,000 of the authorized $100,000,000 of 7% pre- 
ferred stock, redeemable at 115, and about $50,000,000 in new 
bonds. 

If the proportion of this increase which went to the purchase 
of outside securities, including Pacific Mail, be deducted, the 
actual increase of capitalization of the system in six years was 
considerably under 15%, while at the same time the gross earn- 
ings (rail lines only) increased 50%. 

This is largely due to the fact that the road paid no dividends 
until 1906 and that all its surplus was turned back into improve- 
ments of the property. 



Year 


Common 
Stock 


Preferred 
Stock 


Funded Debt 

(Net) 


Total 
Capital 


Gross 

Earnings 

(Rail lines) 


1900. . . 


$197,832,148 
197,849,258 




$305,376,417 
354,737,321 


$503,408,665 
592,156,419 


$65,279,622 
99,123,549 


1906. . . 


39,569,840 



Increase over six years : Total capital, 18% ; gross earn- 
ings, 50%. 

In 1907 the amount of preferred stock was increased to $75,- 
569,840 through the issue of about $36,000,000 new stock. 

Character of Traffic. 

Unlike the Cnion Pacific, the Southern Pacific carefully item- 
izes its traffic. In 1906, farm products contributed 22%, mine prod- 
ucts 27%, forest products 21%, merchandise and manufactures 
30%. It is easy to see that with 9,000 miles of track distributed 
all the way from Texas to the Columbia River, and the Central 
Pacific line striking eastward from Ogden, considering also its 
water lines, that its traffic would be exceedingly diversified. 



662 



SOUTHERN PACIFIC 



Passenger earnings are high, amounting to over 25% of the 
gross earnings. 

Stability of Earnings. 

In ten years the operated mileage of the Southern Pacific 
has increased nearly 2,000 miles, while in the meantime the gross 
earnings have more than doubled. The effect of this, as will 
be seen, was to increase the mileage earnings by more than half. 



Year 


Miles Operated 


Gross Earnings 
Rail Lines 


Per Mile 


1896-7 


7,358 
7,372 
7,843 
8,215 
8,655 
8,757 
8,842 
9,025 
9,138 
9,191 


$46,578,034 
53,424,913 
57,497,155 
65,279,622 
73,163,558 
78,923,723 
82,925,287 
86,910,506 
89,403,632 
99,123,549 


$6,330 


1897-8 


7,247 


1898-9 


7,331 


1899-0. . 


7,946 
8,453 


1900-1 


1901-2 


9,012 


1902-3 


9,378 


1903-4 


9,630 


1904-5 


9,784 


1905-6 


10,784 



In the above table only the earnings of the rail lines are 
given. The earnings of the water lines, &c, increased the gross 
earnings of 1905 by $6,000,000, and in 1906 by $6,500,000; the 
gross income of the land department by $4,700,000 in 1905, and by 
$6,000,000 in 1906, bringing the total earnings of the company for 
1906 up to $111,720,176, as against a total of $100,237,084 in 1905. 

The average freight rates of the Southern Pacific are higher 
than those of any other Pacific road, comparison in 1906 being 
as follows : 

Southern Pacific 1.02c. 

Atchison 93 

Union Pacific 91 

Northern Pacific 83 

Great Northern 79 

Canadian Pacific 74 

It will be seen from the above that the average rates of the 
Southern Pacific are more than 25% higher than those of the 
Great Northern, and almost equally above the Northern Pacific. 
With the completion of the Portland & Seattle line from Spokane 
to Portland, the Great Northern and Northern Pacific will have 
a water grade route from the "inland empire" of Washington 
State to the coast, which will cut out one of the two mountain 



SOUTHERN PACIFIC 



663 



ranges which they traverse and will put these two roads in an 
almost impregnable position for the carriage of over-land traffic. 
It is obvious that they will be in much better position to meet 
either a reduction in rates, should business necessitate, or the 
prospective competition of the Panama Canal. On the other 
hand, it may be argued that the Southern Pacific has turned 
back enormous sums into the improvements of its property, with 
the consequent steady reduction in the cost of conducting trans- 
portation and that, even though its gross revenues might con- 
siderably be reduced by a reduction in rates, it has a higher level 
from which this reduction might be made than the other roads, 
and that a very considerable reduction might sufficiently enlarge 
its traffic to make little sensible difference in the gross or net 
earnings. 

It is to be noted, however, that the average rates of the 
Southern Pacific in 1906 were slightly higher than in the general 
bedrock year of 1899, when they were .95c, while the average 
rates of the Northern roads have very sensibly decreased. This 
fact may have a material bearing in the discussion of freight rates, 
and likewise whether the Union Pacific-Southern Pacific joint 
ownership constitutes a combination in restraint of trade. 

Maintenance. 

For a number of years the Southern Pacific has very heavily 
charged its maintenance account for improvements, its average 
charges being higher than those of any other Pacific road and over 
$1,100 per mile higher, for example, than the average charges 
of the Great Northern. 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


563,056 g 
566,130 1 
[569,487 
591,423 
600,738 
678,554 


$1,175 
1,381 
1,478 
1,364 
1,503 
1,775 


$901 
1,042 
1,222 
1,335 
1,421 
1,554 


$2,076 
2,423 
2,700 
2,699 
2,924 
3,329 


Average 


594,898 


$1,446 


$1,246 


$2,692 


Atchison 

Union Pac. . . . 
North Pac .... 

Gt. North 

Mo. P. (2 yrs. ) 
Burlington 


557,005 
739,206 
729,102 
650,321 
623,807 
580,024 


$1,123 

1,173 

1,300 

960 

819 

1,104 


$1,113 

1,049 

791 

594 

821 

1,032 


$2,236 
2,222 
2,091 
1,554 
1,640 
2,136 



664 SOUTHERN PACIFIC 

It will be seen from the comparison adduced above that, had 
the Southern Pacific's nominal maintenance charges been on a 
Great Northern basis, the surplus shown annually would have 
amounted to over $1,100 per mile more than it did; that is to 
say, in the neighborhood of $10,000,000, or upwards of $50,000,- 
000 for the six years under view. Nor was there any reduction 
in this disparity for 1906. For example, the Great Northern's 
nominal maintenance for 1906 was on a basis of $1,908 per mile, 
as compared with $3,309 per mile for the Southern, an average 
difference of over $1,400 per mile. This, distributed over 9,000 
miles of road would have made a total difference in the surplus 
shown of over $12,000,000. This is a large sum, even for a road 
of the huge operated mileage of the Southern Pacific. There is 
no reason to suppose that the normal maintenance of the one 
road should be 75% higher than the other, and this indicates 
clearly enough the wide margin for a reduction of the operating 
expenses which the Southern Pacific has in case of need. 

Improvements from Earnings. 

Like the Burlington road, the Southern Pacific has charged 
a large amount of improvements directly to operating expenses 
not shown separately in income account, so that there were 
no further appropriations from surplus for improvements, as with 
most other Pacific roads. These separate appropriations for six 
years amounted on the Union Pacific to nearly $20,000,000; on 
the Great Northern to $15,000,000; on the Northern Pacific to 
$20,000,000 and on the Atchison to nearly $16,000,000. If the 
excess maintenance charges on the Southern Pacific had 
amounted for six years to no more than $500 per mile — a low- 
estimate — this would have been equivalent to an annual appro- 
priation for improvements in excess of $4,000,000, or a total for 
the six years under view of around $25,000,000. 

It appears from the reports that in these six years upwards of 
$100,000,000 has been expended by the Southern Pacific in the 
construction of new lines and the reconstruction and betterment 
of existing lines, equipment, &c, and that a part of this expendi- 
ture was provided for from surplus earnings, but the amounts 
of the latter were not separately shown. 

Largely in consequence of this enormous expenditure there 
has been a steady decrease in the cost of conducting transporta- 
tion, the proportion of gross income required for conducting trans- 



SOUTHERN PACIFIC 



665 



portation and general expenses falling, according to Mr. Mundy's 
table, from above 37% in the fiscal years of 1903-4 to a little over 
31% in 1906. It is further stated in the reports that during the 
year of 1906 cost of fuel for locomotives decreased $952,022, 
resulting from the extended use of oil for fuel and from the 
greater capacity of the locomotives. 

Surplus Earnings. 

In the following table the various sums charged off for the 
depreciation of equipment, &c, have been added to the nominal 
surplus shown in the reports of the company. These items were 
not considerable, save in the year of 1906, when included in the 
surplus shown below was $2,117,286 set aside as a reserve for 
maintenance, renewals, &c, and charged into maintenance ex- 
penses. Under this arrangement the surplus earnings for six 
years have shown as follows : 



Year 


Surplus 


Dividends 

Paid on 

Preferred 


Per cent. 

Earned on 

Common 


Average 
Price 


1900-1 


$10,492,512 

10,990,285 

9,462,588 

9,593,214 

13,124,415 

22,030,656 


7 


5.3 
5.5 
4.7 
4.8 
6.6 
9.7 


51 


1901-2 


66 


1902-3 

1903-4 

1904-5., 


51 
52 

66 


1905-6 


79 







It will be seen from the above that the increase for 1906 
was quite extraordinary. This was due partly to decreased interest 
charges from the sale of $39,500,000 of new preferred stock and 
with this retiring a large floating debt ; for the rest, to a heavy in- 
crease in earnings. The showing was not made at the cost of main- 
tenance charges, since the latter were over $400 per mile greater in 
1906 than in 1905, or an increase of nearly 25%, while the gross 
earnings of the company increased only a little over 10%. 

As already noted, owing to the great improvements effected 
in the road, the company was able in 1906 to earn $10,000,000 
more in gross over 1905, with no increase in the cost of conduct- 
ing transportation. This is scientific railroading and indicates 
that the large increase in the surplus shown was upon a healthy 
basis, and really represents the increased earnings capacity of 
the company's capital. This increase was sufficient to provide 
for the 7% dividends on the $39,500,000 of preferred stock issued 



666 SOUTHERN PACIFIC 

in the year preceding, and still raise the percentage earned on 
the common stock from 6.6% in 1905 to 9.7% in 1906. 

The Balance Sheet. 

So complicated are the accounts of the various companies 
constituting the Southern Pacific system that it is extremely dif- 
ficult to determine the actual ledger conditions of the system at 
the close of its fiscal year. 

Excluding materials and other supplies, the balance sheet, as 
of June 30th, 1906, showed: 

Current Assets $21,629,872 

Current Liabilities 19,238,252 

Leaving a working balance $ 2,391,620 

There were deferred assets, consisting principally of ad- 
vances to other lines, including 

The purchase of steamships, &c $48,255,184 

Due from proprietary companies 19,786,944 

Contingent Assets 3,846,232 

Total $71,888,360 

Due to proprietary companies 51,414,142 

Contingent liabilities, including replace- 
ment funds, maintenance, reserves, 
&c ' 15,021,193 

Of the amount due to proprietary companies $38,386,293 
was due to the Southern Pacific Company, all of whose stock is 
owned by the Railway Company, so that this item was merely 
a matter of bookkeeping. 

The item of cash on hand amounted to $14,530,551 and the 
balance to credit of profit and loss at the close of the year was 
$16,701,033.. 

Investment Value. 

The preferred stock of the Southern Pacific, with the 1907 issue 
of $36,000,000 added, amounted to only about 12% of the gross 
capitalization of the system. As the fixed charges in 1906 consumed 
only 49%, the margin of safety for the payment of this dividend is 
wide. It is a seven per cent, non-cumulative stock, redeemable at any 
time up to July 1st, 1910, at 115, and is convertible into common 






SOUTHERN PACIFIC 667 

stock at par at the option of the holder. The fact that this 
stock is convertible at a fixed price, at the option of the com- 
pany, up to a certain date, tends naturally to make it sell some- 
where near this price, and not as much above as it otherwise might. 
The average price of 1906 was around 117, and on this basis its 
yield to the investor is 6% flat. As a matter of fact, there was 
in 1907 very little prospect of this stock being redeemed. There 
seemed little likelihood that the pressure for money, which has 
made it so difficult for railroads to finance improvements and 
additions, would relax sufficiently to enable the Southern Pacific 
to obtain funds at a sufficiently low rate to make the redemption 
of this stock profitable. It appears, therefore, to be a solid 7% 
security, with ample margin of safety for its dividend, and 
yielding at the prevailing rate as high an interest as the best 
short-term railway notes. On the other hand, the stock is con- 
vertible into common stock at par. 

In 1906 the common stock was placed on a 5% basis, amply 
justified by the earnings of the road and with a larger prospect of 
the dividend being increased than reduced. The earnings of the 
road for the fiscal year of 1907 were enormous, and as the 
Union Pacific owns very nearly half of the common stock, to^ 
gether with very nearly half of the preferred stock, there seems 
every reason to believe that a liberal dividend policy, once begun, 
will be continued. 

The holder of the preferred stock, therefore, has the pros- 
pect of being able to convert his preferred into other stock, not 
perhaps yielding 7%, but on a possible 6% basis, likely to sell 
at a rather higher figure than the prevailing prices for the 
preferred, should money conditions return to a more normal basis. 
The question is, therefore, what is the prospect for an increase 
of the dividend on the common. 

The report of 1906 showed that the company had under con- 
struction or projected, over 1,600 miles of new track, including a 
line down the Mexican coast to Guadalajara, about 775 miles. 
The Union Pacific system likewise was building northward from 
Portland to Tacoma and Seattle, and, while the majority of the 
business which this new road may gather will probably be 
turned towards the Oregon Short Line, it will mean that the South- 
ern Pacific will no longer be dependent upon traffic agreements 
for a through line from San Francisco and other California points, 
to Puget Sound. 



668 SOUTHERN PACIFIC ! 

But, while the Union Pacific-Southern Pacific system was 
thus engaged in a vigorous policy of extending, other lines were 
equally active. The Western Pacific was building, as an exten- 
sion of the Denver & Rio Grande — that is to say, the Gould sys- 
tem — a line paralleling the Central Pacific portion of the Southern 
Pacific, from Ogden to San Francisco, crossing and recrossing it 
and offering a line, if not shorter, at least of lower grades. 

Likewise the Southern Pacific will no longer have undis- 
puted possession of the traffic westward from New Orleans, since 
the St. Louis & San Francisco — that is to say, the Rock Island 
system — has obtained entry into that port. The Kansas City 
Southern is likewise building a New Orleans line, and it is to be 
presumed that the Colorado Southern will have trackage rights 
in connection with the 'Frisco line. There has also been exten- 
sive building of rival lines in Texas, paralleling many important 
portions of the Southern Pacific in that great State. In other 
words, in at least two large sections the Southern Pacific must 
meet a much more effective competition than it has had hitherto. 
Given, however, that the business of the country undergoes no 
serious recession, there seems no likelihood that this should 
vitally impair the earnings of the road, and while it might be 
compelled to reduce its rates, this might readily be offset by an 
increase in business. 

By a compact concluded in 1906 the threatened competition 
of the Atchison lines in northern California was eliminated 
through the formation of a company to be operated in the joint 
interest of the two roads. So long, therefore, as the Southern's 
relation with the Atchison remain friendly, and the Union Pacific 
interests are permitted to retain a considerable amount of Atch- 
ison stock, there seems no threat of competition from this source 
which would affect its revenues. The Southern Pacific is, quite 
apart from its connection with the Union Pacific, a system of 
enormous extent, covering a wide variety of territory and, there- 
fore, of traffic. The activity of copper mining in Arizona and 
Mexico has added a high-grade and very profitable source of 
revenues, and the development of arid regions through irrigation, 
with large government aid, can only tend in the same direction. 
It would require, therefore, a business depression of continental 
range vitally to affect the earnings of the Southern Pacific, and 
it would require a very serious depression to impair the perma- 
nence of its dividends. Unless, therefore, such a depression 






SOUTHERN PACIFIC 669 

should come, the securities of the Southern Pacific would appear 
to be as attractive as any to be found on the list. 

The Southern Pacific has for a number of years been a spec- 
ulative favorite and has become especially so since the unusual 
declaration of an initial dividend of 5%. Because of its market 
position, the stock is liable to find its way into weak hands and 
therefore to be subject to very wide fluctuations in price. After 
the payment of the 5°/o dividend, the common sold as high as 
97^2, declining in the severe slump of March, 1907, as low as 70. 
This decline was in the face of an astonishing increase of gross 
earnings (though not of net). While it seems improbable that the 
extraordinary increase in its earnings can continue at the same rapid 
rate, it would seem that nothing short of a severe reaction in trade 
would prevent at least a steady increase, and if this was realized, the 
stock might readily be placed upon a 6% basis. If at the same time, 
money rates were to fall to a more normal level, this would tend to 
put the stock considerably above par. At any considerable premium, 
prospect of a further advance would of course be weighted by 
possibility of the conversion of at least a part of the $75,000,000 of 
7% preferred. The Union Pacific, holding nearly half of the pre- 
ferred, subscribed for at par, would of course have no interest in 
converting, unless the common were raised to better than a 7% 
basis ; and the same is true, doubtless, of a considerable part of the 
remaining holdings. 

At a valuation of $83 per share, the common stock yields the 
investor 6%, and purchased at anything like these figures, would 
seem to represent an attractive investment. The purchaser, 
however, will bear in mind the point noted above — that the 
stock is liable to wide fluctuations, and he will therefore take 
care to buy it only on sharp recessions and at such figures as 
would enable him to view a still further decline with equanimity. 



SOUTHERN RAILWAY. 

The larger part of the old "South" — that is to say, the territory 
lying to the south of the Norfolk and Western and to the east of 
the lines of the Illinois Central along the Mississippi River, is 
practically monopolized by three great systems. These are the 
Atlantic Coast Line, which through its ownership of the Louisville 
and Nashville and several subsidiary roads controls about 11,000 
miles of rail ; the Seaboard Air Line controlling a little short of 
3,000 miles of road along the Atlantic coast; and the Southern 
Railway, which with it ownership of subsidiary roads controls about 
the same mileage as the Atlantic Coast System. 

The Southern Railway is a relict from one of the exploits of 
Jay Gould and directly a reorganization of the old Richmond 
Terminal, which played so large a part in stock market operations 
in the Gould days. The Southern directly operates about 7,500 
miles of rail and controls by stock ownership about 1,800 miles more ; 
practically the same interests which control the Southern are domi- 
nant in the Central of Georgia Railroad with nearly 1,800 miles 
of additional line. 

The Southern extends southwards from Washington and Nor- 
folk to Atlanta, Ga., and Jacksonville, Fla., with branches through 
Chattanooga to Memphis ; through Birmingham to Greenville on 
the Mississippi ; and from Birmingham southward to Mobile. It 
has also a line joining the Cincinnati and New Orleans at Lexington, 
Ky., and extending from there to St. Louis. To all intents the 
Mobile and Ohio, extending from St. Louis to Mobile ; the Alabama 
Great Southern ; the Georgia Southern and Florida ; and the North- 
ern Alabama are part of the Southern system, although operated 
separately. 

Jointly with the Cincinnati, Hamilton and Dayton the Southern 
controls the Cincinnati, New Orleans and Texas Pacific, and jointly 
with the Louisville and Nashville it controls the Monon; through 
these its line reach to Cincinnati and to Chicago on the 
North. Its network of railways forms a compact and homogeneous 
system which largely dominates one of the richest sections of the 
United States. 

(670) 



SOUTHERN 671 

History. 

The Richmond and West Point Terminal Railway and Ware- 
house Company, usually known as the Richmond Terminal, came 
into existence in 1880, largely for the purpose of carrying out Mr. 
Gould's plan of consolidating a huge system of southern railroads. 
Through purchase of stock it gained control of the old Richmond 
and Danville, the East Tennessee, Virginia and Georgia, and the 
Central Railroad and Banking Company of Georgia. All told it 
had built up before the crash, a system of nearly 8,500 miles. 

The Richmond and Danville at the time it was taken over, 
embraced about 3,150 miles of railroad. The company originated in 
1847 and the line from Richmond to Danville was opened in 1856. 
Until its disastrous lease of the Georgia Pacific, it was a highly 
prosperous road and paid as high as 10% dividends. 

The East Tennessee, Virginia and Georgia Railroad, ^ith 

about 2,500 miles of road, represented the consolidation of various 
small lines, the consolidated company being sold under foreclosure 
in 1886 and succeeded by a Railway company of the same name. 

The Central Georgia was one of the oldest railways of the 
country having been begun far back in 1835, and completed in 1843. 
With the amalgamation of several smaller lines it operated at the 
time it became a part of the Richmond Terminal system, about 1,600 
miles of road. It was leased to the Georgia Pacific, which in turn 
was leased by the Richmond and Danville. Up to the time it was 
taken over it had been a very well operated company but in the 
disasters that followed the consolidation, it went into bankruptcy 
and many well-to-do Southern families were ruined. 

In 1892 the system passed into the hands of receivers, having 
defaulted its interest payments, and in the reorganization that 
followed the Central of Georgia was returned to its owners to be 
reorganized, and the balance of the system was consolidated in the 
new Southern Railway Company, operating directly about 4,100 
miles of track. Since then, by the merger of various small lines, it 
has been steadily built up until it now operates directly about 3,400 
miles additional, and controls directly through stock ownership 1,800 
miles more. 

The gross earnings of the company in the first year of its 
operations were $17,000,000, and in 1906 over $53,000,000, a gain of 
more than 200%. 



672 SOUTHERN 

Ownership. 

The control of the reorganized company was vested in a voting 
trust consisting of J. Pierpont Morgan, Charles Lanier, of the 
banking firm of Winslow, Lanier and Company, and George F. 
Baker, president of the First National Bank, New York. This 
voting trust still survives. The Southern is known as one of the 
"Morgan" lines, and is understood to be dominated by Morgan 
interests. 

The directorate of 1906 included Charles Steele of the firm of 
J. P. Morgan and Company; James T. Woodward, president of 
the Hanover National Bank, understood to be associated with 
Morgan interests ; Charles Lanier of the banking firm of Winslow, 
Lanier and Co., New York; Adrian Iselin, Jr., vice-president 
of the Buffalo, Rochester and Pittsburg, and a director in the 
Gallatin National Bank, New York; Robert M. Gallaway, president 
of the Merchants National Bank, also a director in the Monon, the 
Hocking Valley, and in several Gould lines of the West, including 
the Iron Mountain, Texas Pacific and so forth; Edmund D. Ran- 
dolph, ex-treasurer of the New York Life Insurance Company ; 
Harris C. Fahnestock, vice-president of the First National Bank, 
New York, also a director in the Lackawanna, the Central Railroad 
of New Jersey, and other companies ; Samuel M. Inman, of Atlanta, 
Georgia; Joseph Bryan, of Richmond, Va. ; Alexander B. Andrews, 
first vice-president of the Southern Railway, Raleigh, N. C. ; and 
William W. Finley, president, Washington, D. C. 

In 1905 the Southern Railway reported 9,572 share holders. 

Save as to its subsidiary roads, the Southern has no special 
affiliations with other lines; but as already stated the Central of 
Georgia is under practically the same ownership and the two lines 
are operated in close association. Naturally the road participates 
to some extent in the Vanderbilt-Pennsylvania-Morgan community 
of interest scheme. 

Capitalization. 

Coming as it did as a reorganization of a grossly over-capital- 
ized company, the new Southern road did not escape the evil legacy 
of its predecessor and on $120,000,000 of common stock no divi- 
dends have ever been paid or earned. It is instructive to note that 
the stock capital of the company remains the same, with almost 
double the mileage it operated at the beginning. 



SOUTHERN 673 

A large part of the system is made up of leased lines and a 
part of the capitalization of these subsidiary companies is given in 
the company's reports. It is difficult to sift out the rented lines 
from those whose funded debt is stated, but the following table 
gives a fair approximation of the actual capitalization of the road, 
as of June 30, 1906 : 

Common stock $120,000,000 

Preferred stock 60,000,000 

Total stock $180,000,000 

Funded debt 175,631,900 

Leased lines ". 32,358,500 

Equip. Obligations 24,033,216 

Total capital $412,023,616 

Rentals capitalized at 4% 18,842,500 

Approx. gross capital $430,866,116 

Securities held 67,890,646 

Approx. net capital $362,976,470 

Approx. net capital, per mile $49,223 

Average miles operated 7,374 

Net earnings on net capital 4.2% 

Stock on net capital 50% 

Fixed charges on total net income 69% 

Factor of Safety 31% 

It will be seen from the above that the net capitalization is 
high. The estimate of $49,223 per mile compares with $47,453 per 
mile for the Seaboard Air Line; $28,403 for the Atlantic Coast; 
$39,684 for the Louisville and Nashville ; and $31,771 for the Central 
of Georgia. 

When net earnings are compared with the estimated net capitali- 
zation, the fact of over capitalization becomes accentuated, the net 
earnings of 1906 showing only 4.2% on the estimated net capital. 
This is slightly higher than the over-capitalized Seaboard Air 
Line, whose net earnings show only 3.7% on the net capitalization^ 
and stands against 7.1% for the Atlantic Coast Line, 8.9% for the 
Louisville and Nashville, and, for example, against 6.7% for the 
Norfolk and Western and 7% for the Chesapeake and Ohio. Ail of 

43 



674 SOUTHERN 

these figures are below the general level of western roads, with 
about the same mileage earnings, and not a very different character 
of traffic. 

But of this high capitalization a full half is represented by 
stock and two-thirds of this stock, namely the $120,000,000 of com- 
mon, represents merely possibilities. 

The showing of Fixed Charges on Total Net Income however, 
is not favorable. Even in the highly prosperous year of 1906, the 
Fixed Charges consumed nearly 70% of available income, leaving 
a Factor of Safety on the underlying securities of only 30% ; and in 
1907 the proportion of Fixed Charges was heavily increased. 

On the Norfolk and Western, for example, Fixed Charges were 
only 37% in 1906, on the Baltimore and Ohio only 39%, and on the 
Pennsylvania only 38%. In other words, it will be seen that the 
reorganized system is still heavily loaded with debt, and is not in a 
strong position to stand a prolonged period of adversity. The 
Fixed Charges of the reorganized company were not heavily scaled 
as in the resuscitation of many other bankrupt roads, and instead of 
keeping this indebtedness down as would have seemed the wiser 
policy, the company has added practically $100,000,000 of debt since 
it was reformed. 

Equities Owned. 

Of the $67,000,000 of securities owned, shown in the table 
above, $8,652,000 were the company's own development and general 
mortgage bonds. Practically all of the balance of these securities 
was pledged under the various mortgages. 

The Southern owns $8,086,000 of the Mobile and Ohio general 
mortgage 4% bonds, and $5,672,200 stock. On this stock it is at 
present receiving 5% dividends while the road is actually earning 
about 20% on its stock. 

The Southern owns $4,898,450 of the common stock and $1,- 
936,700 preferred of the Monon, constituting one half of the 
control of that road. It receives 4% on the preferred and 3% on 
the common and the latter dividend might readily be doubled on the 
basis of present earnings. The company has therefore a small 
equity in this holding. 

The balance of the securities amounting to par value of over 
$30,000,000 is grouped as "Miscellaneous" without being further 
itemized. In 1906 on securities of a book valuation of $59,238,646 
the company received a little over 2^%, so that on the basis of 



SOUTHERN 



675 



the 1906 returns the book valuation would be excessive. It is prob- 
able, however, that the equities in the undistributed surplus of the 
various subsidiary companies would readily bring the income up to 
a figure which would indicate somewhere near the book valuation. 

Beyond the items mentioned the Southern could not greatly 
swell its income by increasing the distribution of its controlled com- 
panies. 

Increase of Capitalization. 

From the following table it will be seen that since 1900, while 
the amounts of both common and preferred stock have remained 
stationary, the funded debt has been increased $97,000,000. 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900. . . . 
1906.... 


$120,0000,00 
120,000,000 


$60,000,000 
60,000,000 


$135,859,592 
232,026,165 


$315,859,592 
412,026,165 


$31,388,015 
53,641,438 


Increase over six years: Total Capital, 30%; gross earnings, 71%. 



The effect of this increase in debt was to increase the nominal 
indebtedness of the road by 70%, and at the same time its gross 
earnings rose 71%. This was not a remarkable showing. The effect 
of the increase in earnings has simply been to give a semblance of 
value to a large amount of securities which had otherwise no value 
whatever, save for the purpose of stock control. Had this increase 
in the capitalization been in stock instead of an addition to an already 
heavy burden to the Fixed Charges, the company would have been 
in a very different position from what it is now. 

Character of Traffic. 

The passenger earnings of the road are relatively high, consti- 
tuting about one-quarter of the gross earnings. 

Of the tonnage moved about 13% is farm products, of which 
cotton and its products make up about one-third. Products of mines 
make up 38% of the gross tonnage, the larger part being carriage 
of bituminous coal. Lumber and manufactures make up the 
balance. 

The management has apparently not been able to increase the 
average train load at the same rate which for example many western 
roads have shown. In nine years from 1898 the average train load 
has increased from 149 tons to 204 tons. The average receipts per 
ton-mile have remained practically stationary within this period, 



676 



SOUTHERN 



amounting to .93c. per ton per mile in 1898 and 1906. In the same 
period average receipts per freight train mile have risen from $1.39 
to $1.90. 

Stability of Earnings. 

The increase in earnings in the ten years ended in 1906 has 
been something extraordinary. As noted above the average of 
freight rates received has been unchanged so that the entire increase 
of earnings has been due to an increase of business. In these ten 
years the operated mileage has increased about 57% while in the 
same period the gross earnings have increased more than 200%. 
As a result of this tremendous advance the gross earnings per mile 
have risen from $3,970 to $7,274, an increase of 82%. This in- 
crease has been steady, showing no check from year to year, as the 
following table reveals : 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896-7 


4,806 
4,938 
5,378 
6,365 
6,425 
6,744 
7,129 
7,164 
7,199 
7,374 


$19,079,500 
21,095,839 
25,353,686 
31,388,015 
33,607,582 
37,712,248 
42,354,060 
45,109,777 
48,145,108 
53,641,438 


$3,970 


1897-8 


4,272 


1898-9 

1899-0 


4,714 
4,947 


1900-1 


5,230 


1901-2 


5,592 


1902-3 


5,941 


1903-4 


6,297 


1904-5 


6,688 


1905-6 


7,274 







The very remarkable increase in earnings for 1906 will not 
escape the attention of the investor, the sheer increase amounting to 
nearly $600 per mile. If anything like this rate of increase over ten 
years could continue, it is obvious that the Southern would soon be 
in a strong position. In the 1906 report, the company points out 
that since June 30th, 1895, the road has added nearly a thousand 
locomotives, increasing the number to 1,541, it has doubled the num- 
ber of passenger cars, and it has more than tripled the number of 
freight cars. 

Maintenance. 

But while this great increase of earnings has taken place, there 
has been no corresponding increase in the sums devoted to the 
maintenance of the road. In the six years from 1901, the traffic 
density has risen by nearly one-half. In the meantime the average 
of maintenance of way per mile has risen only from $846 to $965 
per mile. The outlay in 1901 may have been liberal, though it does 






SOUTHERN 



677 



not seem so, but in any event it is difficult to believe that an added 
traffic density of nearly 50% could be cared for by an added mainte- 
nance of way of only $120 per mile. 

The maintenance of equipment has increased with the increase 
of the traffic, and in 1906 was undoubtedly liberal. Probably, how- 
ever, between the two there was no excessive expenditure and no 
earnings concealed in these items. The table for six years is as 
follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


364,833 
397,184 
414,469 
449,227 
467,893 
524,317 


$846 
855 
804 
796 
897 
965 


$764 

838 

970 

1,014 

1,035 

1,164 


$1,610 
1,693 
1,774 
1,810 
1,932 
2,129 


Average 


435,987 


$860 


$964 


$1,824 


L. &N 

Seaboard 

AtL Coast 

111. Central. . . . 
So. Pacific . . . 


929,594 
311,366 
259,769 
1,180,351 
594,898 


1,490 

620 

709 

1,386 

1,446 


1,537 

611 

556 

1,486 

1,246 


3,027 
1,221 
1,265 

2,872 
2,692 



Compared with the other southern roads it will be seen that the 
Southern makes a very favorable showing, but it will be remembered 
that the standard of southern roads, with the exception of the Louis- 
ville and Nashville, is not high. 

Improvements from Earnings. 

By 1904 the surplus shown had reached so favorable a figure 
that the road was able to begin to devote a part of its surplus for 
betterments and in three years the following sums were set aside : 

1903-4 $773,806 

1904-5 1,056,549 

1905-6 999,827 



Total $2,830,182 

Laid out over upwards of 7,000 miles of track these are not very 
large sums, and cannot of course be compared with northern and 
western roads. For example, the Norfolk and Western, with present 
earnings per mile not very greatly in excess of the Southern and 
about the same average of maintenance, has in these same three 



678 



SOUTHERN 



years turned back into the road for betterments, $14,600,000. Simi- 
lar large sums have been set aside by the roads of the middle West. 
The reason that the northwestern roads are able to make these lavish 
outlays from earnings and still pay large dividends on their entire 
capital stock is that they are on the average capitalized for about 
$30,000 per mile as against $50,000 per mile for the Southern Rail- 
way, and because their Fixed Charges consume only from 40% 
to 45% of their available surplus income, as against nearly 70% 
for the Southern. It is not due to any difference in earnings, or in 
economy of operation, and is a very practical illustration of what 
over-capitalization means. It is in consequence of this that the 
common stock of these northwestern roads sells at around $200 per 
share, while that of the Southern is a purely speculative article at 
from $20 to $40 per share. 

Surplus Earnings. 

Another consequence of the same fact is that the surplus avail- 
able for dividends on the Southern has never shown more than a 
bare 10% on its net income, while many well-managed roads like 
the St. Paul frequently show as high as 25%. 

From the following table it will be seen that in the six years up 
to 1906, little or nothing has ever been earned on the common stock, 
above the full 5% on the preferred. 



Year 



1900-1. 
1901-2. 
1902-3. 
1903-4. 
1904-5. 
1905-6. 





Dividend 


Per cent. 


Average 


Surplus 


Paid on 


Earned on 


Price Vot. 




Preferred 


Common 


Trust Certifs. 


$3,540,500 


4 


.45 


27 


3,600,897 


5 


.5 


32 


3,707,477 


5 


.58 


26 


4,180,399 


5 


.98 


28 


5,151,632 


5 


1.79 


33 


5,229,065 


5 


1.85 


38 



Dividend Record. 

In 1897 a one per cent, dividend was begun on the $60,000,000 
of preferred stock, increasing to 2% in 1899, 3% in 1900, 4% in 
1901. The full 5% has been paid from 1902. 

The Balance Sheet. 

On June 30th, 1906, the balance sheet showed: 

Current assets $14,685,966 

Current liabilities 12,346,045 



Leaving a credit balance of $2,339,921 



SOUTHERN 679 

The item of cash amounted to $5,473,300, and the credit to 
Profit and Loss was $8,341,744. 

In addition to the liabilities grouped up under these amounts, 
there were a number of larger items not so included, e.g. 

Certificates of indebtedness $1,750,000 

Account of purchase of Tennessee Central 

bonds unmatured 2,750,000 

Account of new steel rail purchase unmatured 2,660,250 
Balance of purchase price of the Northeastern 

of Georgia 107,000 

Interest and rentals accrued but not due 1,400,616 

Taxes accrued but not due 606,323 

Reserve for dividends payable 1,500,000 

Total $10,774,189 

Against these liabilities these were: 

Bills receivable, deferred but secured $1,277,995 

Advances to subsidiary companies 3,116,457 

Sundry accounts 489,752 



$4,884,204 



It will be seen therefore that above its nominal working capital 
the company had at the close of its fiscal year a considerable amount 
of obligations requiring speedily to be funded in one way or another. 

Investment Value. 

The report of 1906 stated that the rapid increase in the business 
of the road required larger expenditures than hitherto and to meet 
these expenditures the road began the issue of more bonds. It 
created in 1906 a development and general mortgage of an authori- 
zed amount of $200,000,000, $15,000,000 par value of this being 
issued. 

In January of 1907 $15,000,000 of 3-year 5% notes were sold 
at a considerable discount. 

The effect of this note issue and some smaller bond issues was 
to raise the fixed charges for 1907 by approximately $1,000,000. In 
the meantime net earnings showed a rather terrific slump. With a 
small increase in gross, the net for the year declined more than 
two millions. The result of this, with no considerable increase in 



680 SOUTHERN 

the amount of other income, was to raise the proportion of fixed 
charges to total net income to above 85% — a highly significant 
figure. The surplus remaining was decreased by more than half 
from the previous year and was insufficient to meet the full 5% on 
the preferred stock, though the half yearly dividend of two and one- 
half per cent, was declared in March. The preferred stock is entitled 
to a 5% non-cumulative dividend. In January of 1906 it sold at 
$103 per share and in April of 1907 it sold at $63 per share. The 
proportion of expenses and taxes to the gross in 1906 was 74% and 
in 1907 this rose to around 78%. It is obvious that unless the com- 
pany can make a better showing than this, the stock presents little 
attraction as a solid investment. 

As for the $120,000,000 of common, it has the distinction of 
being the largest amount of pure water shown by any railway in the 
United States. At no time in the company's history has it ever had 
a semblance of value other than for voting purposes. And yet this 
stock sold at $36 per share in 1903 and at $42 per share in 1906. 
It sold as low as $16 per share in 1903 and in April of 1907 it sold 
below $20. With steadily rising costs of operation and proportion 
of fixed charges the stock could hardly be regarded as an attractive 
speculation even at the latter figures. 



TEXAS AND PACIFIC RAILWAY. 

The Texas & Pacific forms a part of the Gould Southwestern 
system and is controlled in the interest of and operated in close 
association with the Missouri Pacific. Its lines extend from 
New Orleans to Texarkana, where it joins the lines of the Iron 
Mountain, and thence westerly through Fort Worth to El Paso, 
at a westernmost point of Texas. It also operates in close as- 
sociation with the International & Great Northern, whose lines 
extend southwardly from Long View and Fort Worth to Gal- 
veston, and to Laredo on the Mexican border, where they join 
the lines of the Mexican National Railroad. 

In 1906 the Texas & Pacific operated 1,848 miles and its direc- 
torate was made up entirely in the Gould interest, comprising 
George J. Gould, president, Edwin, Frank and Howard Gould, 
Winslow S. Pierce, etc. 

As of June 30th, 1906, the Missouri Pacific owned $6,252,000 
of the stock, and practically all of the income bonds, save those 
held in the treasury, were owned by the Iron Mountain, hav- 
ing been exchanged for 4% collateral Iron Mountain bonds on 
a basis of 65%. 

The company was organized under Act of Congress in 1871, 
and after passing into hands of receivers was reorganized with- 
out confirmation of the foreclosure sale of 1887, whereby the 
original federal charter was preserved. 

Capitalization. 

As of January 1st, 1907, the capital account stood as follows : 

Common stock $38,763,810 

Income bonds 24,984,645 

Total $63,748,455 

(681) 



682 TEXAS & PACIFIC 

Funded debt 29,516,936 

Equipment bonds, etc 1,010,901 



Total capital $94,276,292 

Securities held 647,597 



Approx. net capitalization $93,628,695 



Average net capital, per mile $50,664 

Miles operated [ 1,848 

Net earnings on net capital 5.3% 

Stock on net capital 67% 

Fixed Charges on total net income 40% 

Factor of Safety 60% 

It will be seen that with gross earnings of only $8,000 per 
mile, the capitalization of $50,664 per mile was very high. If, 
however, the income bonds be included as a part of the stock 
issues, they comprised a full two-thirds of the gross capitaliza- 
tion, and on the $38,763,810 of common stock no dividends have 
ever been paid. 

In 1906 the net earnings showed the fairly respectable 
figure of 5.3% on the net capitalization, but this was an excep- 
tional year, and that of previous years was much lower. 

Excluding the interest paid on the income bonds, the fixed 
charges for 1906 consumed only 40% of the total net earnings, 
leaving a very solid margin of safety for the underlying securi- 
ties. The full 5% interest on the income bonds consumed only 
20% more, leaving a margin of safety for these bonds of 40%. 

The securities held by the Texas & Pacific were chiefly 
its own bonds, and of no especial interest. 

The company was very heavily over-capitalized from the 
beginning, but since 1900 there has been practically no increase 
in the stock and bond issues, save about one million of equipment 
bonds, etc., and in the meantime the income has considerably 
increased, so that the company has been slowly growing up to 
its capitalization. Considerable sums have been turned back 
from earnings into improvements of the property. 

The following table exhibits the mileage and earnings of 
the road for a series of years: 



TEXAS & PACIFIC 



683 



Year 



1896 
1897 
1898 
1899 
1900 
1901 
1902 
1903 
1904 
1905 
1906 



Miles Operated 


Gross Earnings 


Per Mile 


1,499 


$6,825,145 


$4,453 


1,499 


7,588,549 


5,062 


1,499 


8,006,503 


5,341 


1,492 


8,300,185 


5,563 


1,527 


9,751,121 


6,385 


1,634 


11,769,942 


7,203 


1,697 


11,236,601 


6,621 


1,727 


12,094,744 


7,003 


1,826 


12,433,147 


6,809 


1,826 


12,130,391 


6,643 


1,848 


14,914,607 


8,110 



It will be seen that with no great increase in mileage, the 
earnings have nearly doubled in ten years, and since 1900, with 
practically no increase of capitalization, have increased more 
than 50%. This is an excellent showing. The traffic of the 
road is largely agricultural, cotton shipments being a consider- 
able factor. 

Maintenance. 

The following table exhibits the traffic density and main- 
tenance charges over a period of seven years: 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900 


438,845 
540,242 
435,146 
484,576 
401,301 
445,948 
520,124 


$988 
1,103 
919 
879 
730 
706 
824 


$735 

852 
831 
808 
752 
750 
994 


$1,723 


1901 


1,955 


1902 


1,750 


1903 


1,687 


1904 


1,482 


1905 


1,456 


1906 


1,818 






Average 


466,599 


$878 


$817 


$1,695 



It will be seen that the maintenance charges were rather 
low, even for a prairie road with the traffic density of the Texas 
& Pacific. Still they compare favorably with those of other roads 
in this section. It will be noted that the traffic density is rather 
variable and that it was higher in 1901 than in any subsequent 
year. The charges for 1906 were about in keeping with the gen- 
eral charges for the period under view. 

In addition, however, to the ordinary maintenance charges, 
considerable sums have been set aside from the surplus for im- 
provements, as follows : 



1900, 
1901 



$655,307 
926,351 



684 



TEXAS & PACIFIC 



1902 2,207,358 

1903 841,385 

1904 1,272,233 

1905 1,128,118 

1906 1,518,574 



Surplus Earnings. 

Before the payment of the interest on the income bonds and 
before charging off the sums included in the table above, the 
surplus has shown as follows : 



Year 



1900 
1901 
1902 
1903 
1904 
1905 
1906 





Per cent. 


Per cent. 


Average 




Paid on 


Earned on 


Price. 


Surplus 


Income 


Common 


Calendar 




Bonds 


Stock 


Years 


$1,792,585 


li 


1.4 


20 


2,413,329 


4 


3. 


36 


1,881,744 


5 


1.6 


45 


1,780,107 


5 


1.3 


32 


2,430,973 


5 


3. 


29 


2,010,796 


5 


2. 


35 


3,082,619 


5 


4.8 


35 



The Balance Sheet. 

As of June 30th, 1906, there were : 

Current Assets of $3,382,744 

Current Liabilities of 6,561,387 



Leaving a debit balance of $3,178,643 

Included in the current assets were : 

Bills Payable $4,450,200 

Vouchers unpaid 1,081.^924 

The item of cash amounted to only $552,467. It will be 
seen, therefore, that the finances of the company were not in 
good shape, and that an issue of bonds or notes would be re- 
quired to provide the road with working funds. 

The credit balance of the income account was $1,570,712, 
the larger part of which would be required for the payment of 
the 5% interest on the income bonds for the year. 

Investment Value. 

It will be seen from the table of surplus earnings that in the 
seven years there shown, there have been funds ample for the 
payment of the full 5% on income bonds and the full amount has 



TEXAS & PACIFIC 685 

been paid from 1902. Previous to that, 4% was paid in 1901 and 
1*^2% in 1900. These bonds being almost entirely held in the 
Iron Mountain treasury, the matter was of interest only to the 
stockholders of the Iron Mountain road. 

Above the payments on the income bonds, a small percent- 
age has been earned in each year on the common stock, the ex- 
ceptional year of 1906 showing 4.8%. On account, however, of 
the heavy capitalization of the company, practically all of this 
surplus was required for the improvement of the road ; and the 
further fact that the company in 1906 was in need of working 
funds rendered the prospect of dividends on the stock rather 
vague. 

It will be further noted that the mileage earnings were 
higher in 1901 than in any subsequent year up to 1906. In other 
words, the road has not shared to any large extent in the tre- 
mendous prosperity of the period. Competition is becoming 
very much keener, owing to the entry of the Rock Island system 
(the Frisco line) into New Orleans and the construction of the 
various other new lines in Texas. Unless, therefore, earnings 
should increase much more rapidly than they have, the stock 
seems more likely to fluctuate within somewhat the same limits 
as in the four or five years preceding. It sold up as high as $54 
in 1902, under the exceptional showing of that year, declining as 
low as $20 in 1903 and 1904. It sold up to $41 in 1905, declining 
in the slump of March, 1907, to $25. 

Earning no dividend, the stock is expensive to carry and 
should the high rates of 1906-7 continue, it is probable that the 
stock would decline to even lower figures than 1904. Purchased 
at very low prices it might show a considerable profit to holders 
who are content to wait, but there are other non-dividend stocks 
on the list of roads showing a much more vigorous management 
and larger prospects, which would likely exhibit much greater 
powers of recovery from any extensive recession of prices. 



TOLEDO AND OHIO CENTRAL RAILWAY. 

The Toledo and Ohio Central is practically a part of the Hock- 
ing Valley system. Ninety-nine per cent, of its stock is owned by 
the Hocking Valley, and its directors and operating officers are 
largely the same, though it is operated separately. 

It is chiefly a coal road, running from the Ohio River to 
Toledo, through central Ohio, and extending under trackage rights 
into West Virginia. It operates a total of 441 miles. The line rep- 
resents the reorganization, in 1885, of the old Ohio Central. In 1901 
the Hocking Valley acquired all but a few shares of both common 
and preferred stock, exchanging on a basis of 70% of the Hocking 
Valley stock of the same class. It guarantees the principal and 
interest of the Kanawha and Michigan first mortgage bonds, $2,- 
469,000, and, jointly with the Hocking Valley, the Kanawha and 
Hocking Valley Coal and Coke Company's bonds, $3,000,000, and 
those of the Continental Coal Company, $2,750,000. 

Seven of the ten directors are also directors of the Hocking 
Valley, the remaining three being Decatur Axtell, vice-president of 
the Chesapeake and Ohio Railroad ; F. D. Underwood, president of 
the Erie Railroad ; and Horace Andrews, largely interested in street 
railways in Cleveland, Ohio. In 1906 the chairman of the board 
was Decatur Axtell ; the president is N. Monsarrat, president of the 
Hocking Valley. 

Capitalization. 

On June 30th, 1906, the capital account stood as follows : 

Common stock (outstanding) $5,852,100 

Preferred stock. 3,708,000 

Total stock $9,560,100 

Bonded debt 9,680,182 

Nominal capital $19,240,282 

Securities held 2,569,766 

Approx. net capitalization $16,670,516 

(686) 



TOLEDO & OHIO CENTRAL 

Approx. net capital, per mile $37,800 

Average miles operated 441 

Net earnings on net capitalization 6.8% 

Stock on net capitalization 57% 

Fixed charges on total net income 36% 

Factor of Safety 74% 



687 



The company formerly held a controlling interest in the Kana- 
wha and Michigan Railroad, but with the plan for consolidating the 
latter with the Hocking Valley, this stock turned up in the treasury 
of the latter road. 

The capitalization of the road has not increased in a number 
of years. 

Of the gross earnings, coal operations produce considerably 
more than one-half of the total, other freight earnings about one- 
quarter, and passenger earnings a half of the latter. The mileage 
of the road has increased only through a slight addition of trackage 
rights, and meanwhile, the earnings per mile have risen from $6,500 
to $9,233, an increase of nearly 50%. 

Maintenance. 

The maintenance 'has apparently been very liberal, the various 
items through a series of years standing as follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 

$930 
1,004 
1,241 
1,199 
1,410 
1,566 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


1,117,594 
1,262,552 
1,457,388 
1,420,627 
1,527,034 
1,755,351 


$1,194 
1,490 
1,389 
1,462 
1,598 
1,691 


$2,124 
2,494 
2,630 
2,661 
3,008 
3,257 


Average 


1,423,424 


$1,225 


$ 1,471 


$2,696 


Hocking Val . . 
Tol. St. L. & W 


2,778,318 
1,046,139 


1,739 
996 


3,131 
959 


4,870 
1,955 



In addition to the $1,436,000 appropriated in 1906 for mainte- 
nance, a further sum of $312,809 was set aside for additions and 
improvements. 

Surplus Earnings. 



The surplus earnings shown since 1901 were as follows : 



688 TOLEDO & OHIO CENTRAL 

1900-1 $210,356 

1901-2 139,605 

1902-3 325,425 

1903-4 431,300 

1904-5 368,402 

1905-6 553,926 

Dividends on the preferred were paid from 1890 to 1896, and 
on the common from 1891 to 1893, when they were suspended, and 
no dividends have been paid since. 

The surplus shown for 1906, including appropriations for ad- 
ditions was equivalent to 5% on the preferred, and 6.3% on the 
common stock. The net surplus, after charging off these sums, 
would have paid the 4% preferred dividends, and left a small mar- 
gin for the common. The Hocking Valley's equity in the undis- 
tributed earnings, after charging off improvements, amounted in 
1906 to about $240,000. 

The balance sheet for 1906 showed that the company was in 
need of working capital. "Working assets" amounted to $898,725, 
the working liabilities to $1,258,100, leaving a debit balance of 
$359,375. 



TOLEDO, ST. LOUIS AND WESTERN 
RAILROAD. 

The Toledo, St. Louis and Western — the "Clover Leaf" as 
it is more familiarly known — operates a single-track road from 
Toledo to St. Louis in an almost direct line. It does not touch 
any of the larger points such as Indianapolis, and is dependent 
chiefly for its prosperity on its traffic arrangements with the 
Grand Trunk Railway. With the latter it jointly owns the De- 
troit and Toledo Shore Line Company, which gives the Clover 
Leaf direct access to Detroit, and practically increases its length 
by sixty miles. 

The entire amount of stock is lodged with a voting trust 
consisting of F. P. Olcott, Thomas H. Hubbard and William A. 
Read, who have power to sell the stock subject to the approval of 
the majority of the amount of each class of trust certificates 
issued against the stock. The road has been reported sold first 
to the Vanderbilts and then to the Erie ; then in connection 
with the contemplated reorganization of the Cincinnati, Hamil- 
ton and Dayton. 

The road is a reorganization in 1900 of the Toledo, St. Louis 
and Kansas City, which property was sold under foreclosure in 
that year. The latter in turn was a reorganization in 1886 of the 
Toledo, Cincinnati and St. Louis which went into the hands of 
a receiver in 1893 after default of its interest payments. The 
line operates directly 451 miles of road. The Detroit and Toledo 
Shore line, owned jointly with the Grand Trunk, is not included 
in its operations. The Clover Leaf is sometimes classed as one 
of the roads of the "Hawley Group," and its ownership is very 
much the same as that of the Minneapolis and St. Louis, the 
Colorado Southern, etc. 

The directorate includes William A. Read, chairman, of W. 
A. Read and Company, bankers, New York ; also a director in 
the Chicago Great Western, the Chicago, Indianapolis and Louis- 



44 



(689) 



690 TOLEDO, ST. LOUIS & WESTERN 

ville, the Interborough, etc. ; Theodore P. Shonts, president and 
general manager, also a director in the Iowa Central and chair- 
man of the Panama Canal Commission; Thomas H. Hubbard, 
vice-president, also a director in the Wabash, vice-president of 
the Chattanooga Southern, president of the Guatemala Central, 
chairman of the board of the International Banking Corporation, 
etc. ; Edwin Hawley, president of the Minneapolis and St. Louis, 
etc.; Henry E. Huntington, largely interested in traction syndi- 
cates in southern California, also a director in the Minneapolis 
and St. Louis, Iowa Central, etc. ; John Crosby Brown, formerly 
president of the Newburg, Dutchess and Connecticut recently 
absorbed by the New Haven road, and up to 1906 a director in 
the Wisconsin Central ; Hugo Blumenthal, a director of the 
United Copper Company; John J. Emery, vice-president of the 
Dayton and Michigan, a director in the American Light and 
Traction Company, Colorado Southern, etc. ; C. S. W. Packard, 
of Philadelphia ; Charles H. Tweed, of New York, also a director 
in the National of Mexico; and James N. Wallace, presi. :nt 
of the Central Trust Company, New York, also a director in the 
National of Mexico. Messrs. Hawley, Tweed and Huntington 
were formerly associated on the board of the Southern Pacific. 

F. P. Olcott, who with Messrs. Hubbard and Read consti- 
tuted the voting trust, is president of the Central Trust Company, 
and was formerly a director in the Clover Leaf, Colorado South- 
ern, etc. 

The so-called Hawley Group of roads is in three sections 
which do not join, and the most important affiliation with the 
Clover Leaf is with the Grand Trunk which affords it a direct 
outlet to the east. 

Capitalization. 

As of June 30th, 1906, the capital account of the road stood 
as follows : 

Common stock $10,000,000 

Preferred stock 10,000,000 

Total stock $20,000,000 

Funded Debt (net) 16,050,000 

Total capital $36,050,000 



TOLEDO, ST. LOUIS & WESTERN 691 

Approximate capital per mile $79,933 

Average miles operated 451 

Net earnings on capital 3.3% 

Stock on net capitalization 55% 

Fixed Charges on Total Net Income 61% 

Factor of Safety 39% 

The amount of funded debt shown is after deducting $450,- 
000 of prior lien bonds held in the treasury. 

It will be seen that the nominal capitalization is high com- 
pared with its earnings, but more than half of this capitalization 
is represented by stock upon which no dividends had ever been 
paid until 1907, when preferred dividends were begun. The Clover 
Leaf's figure of $79,933 per mile is higher even than that of the 
over-capitalized Wabash which was only $69,170 per mile. 

The fact of over-capitalization is further reflected in the 
showing on net earnings on capital, which amounted to only 
3.3% in the highly prosperous year of 1906. This compares with 
the figure of 3.7% for the Wabash and with a minimum of 6% or 
7% on successful roads over the country generally. The propor- 
tion of Total Net Income consumed by Fixed Charges is neither 
low nor very high, and leaves a margin of safety of about 40% 
for the underlying securities. 

A very notable fact about the history of the road is that its 
capitalization has increased but slightly since the reorganization 
in 1900 — only about half a million dollars in bonds — while the 
gross earnings have more than doubled. This is a very strong 
showing, and were it continued, the road would soon be able 
comfortably to pay dividends on its preferred stock. 

Aside from its ownership of a half interest in the Detroit 
and Toledo Shore Line, the road has no equities in other 
companies. 

Character of Traffic. 

The Clover Leaf is essentially a freight road, its freight 
earnings amounting to about 80% on the gross. Passengers rep- 
resent .only about 13%. The freight tonnage is widely distrib- 
uted, the largest single item being that of anthracite coal which 
amounts to only 20% of the total. Farm products, agriculture, 
etc., divide the balance evenly. 



692 



TOLEDO, ST. LOUIS & WESTERN 
Stability of Earnings. 



The following table shows the earnings of the road for the 
last year of the receivership and the seven years of the reorgan- 
ized company. It will be seen that the earnings fell rather sharply 
from the last full year of the receivership, but from 1900 they 
have steadily gained. The mileage has remained the same while 
the mileage earnings have risen from $4,302 in 1900 to $9,329 in 
1906, a gain of 115%. 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1897-8 


451 

451 
451 
451 
451 
451 
451 
451 


$2,245,974 


$4,983 


1898-9 


1899-0 


1,940,378 
2,490,566 
2,640,880 
3,111,358 
3,341,648 
3,785,165 
4,205,051 


4,302 
5,525 
5,859 
6,903 


1900-1 


1901-2 


1902-3 


1903-4 

1904-5 


7,414 

8,398 


1905-6 


9,329 



Maintenance. 

It will be seen from the following table that the traffic 
density has very nearly doubled since 1901, and about the same 
is true of the gross earnings from the same year. Obviously 
therefore the road was receiving about the same average rates 
as in 1901. Maintenance charges have shown as follows: 



Year 


Traffic Density 


JU Maintenance per Mile 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


773,934 
793,538 
1,024,212 
1,000,405 
1,189,109 
1,495,636 


$803 

807 

982 

1,016 

1,135 

1,237 


$710 
757 

1,010 
981 

1,057 

1,237 


$1,513 
1,564 
1,992 
1,997 
2,192 
2,474 


Average 


1,046,139 


$996 


$959 


$1,955 


Wabash 

Lake E.& West 
Tol. & O. Cen. 


880,032 

592,307 

1,423,424 

910,426 


1,332 

999 

1,225 

1,184 


1,370 

733 

1,471 

1,693 


2,702 
1,732 
2,696 

2,877 



* Average for 1904 and 1905. 

It will be seen that maintenance of way has risen a little 
over 50%, and maintenance of equipment about 70%. Compared 
with other roads in the same territory, it will be seen that the 



TOLEDO, ST. LOUIS & WESTERN 



693 



Clover Leaf's maintenance charges have averaged considerably 
lower. The average traffic density of the Wabash, for example, 
is considerably less for the six years under view, while its main- 
tenance charges have averaged $650 per mile higher. Similarly, 
Lake Erie and Western, with only a little more than half the 
traffic density has spent nearly as much in these six years 
for the upkeep of its road. Compared with the Toledo and Ohio 
Central, the maintenance standard has been about the same ; 
but compared with the Vandalia for the two years that the con- 
solidated Vandalia has been in operation, it will be seen that the 
Clover Leaf's standard was more than $500 per mile lower. 
Gauging the Clover Leaf therefore with its competitors, its 
expenditures for maintenance have not been excessive. 

Aside from its maintenance charges the Clover Leaf has not 
made any specific appropriations for improvements from earn- 
ings, as is the general practice of prosperous lines. 

Surplus Earnings. 



The surplus shown on the basis of the maintenance charges 
noted above have been as follows for the six years : 



Year 



1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



Surplus 



$82,555 
55,690 
171,639 
223,944 
238,976 
490,573 



Per cent. 

Earned on 

Preferred 



.5 
1.7 

2.2 
2.3 

4.7 



Average 

Price 
Preferred 



34 

44 
36 
54 
58 
52 



The gain in surplus in the six years under view has 
amounted to nearly 500% and the surplus in 1906 was sufficient 
to pay the full 4% dividend on the preferred. This was after 
more liberal maintenance by nearly $300 per mile than in any pre- 
vious year, but it is to be noted that in this same year of 1906, 
the traffic density increased nearly 25%, while at the same time 
maintenance charges increased only about 15%. 



• i 



The Balance Sheet. 



Excluding materials and supplies, the balance sheet at the 
close of the fiscal vear of 1906 showed : 



694 TOLEDO, ST. LOUIS & WESTERN I 

Current assets) $759,927 

Current liabilities 720,120 

Leaving a working balance of $39,807 

There was cash in hand to the amount of $221,475, and the 
surplus to credit of profit and loss was $1,178,765. 

Investment Value. 

The preferred stock of the Clover Leaf is entitled to non- 
cumulative dividends of 4%. The provision as to the common 
is that after the 4% has been paid on the preferred, any further 
dividends for that year shall go to the common stock. 

In March, 1907, an initial semi-annual dividend of 2% was 
declared, with fair prospects of a continuance of this dividend should 
the business of the road continue equally favorable. On this basis 
the stock was readily worth above $50 per share and its average 
price in 1906 was about the latter figure. 

But the investor in Clover Leaf probably thinks more of the 
possibility of a sale of the road to one of the larger lines and what 
the road might bring. Were the net earnings of 1906 (very 
nearly $1,200,000) capitalized on a 5% basis, this would give a 
valuation of very nearly $25,000,000 to the road, which after de- 
ducting $16,000,000 of bonds, would leave a valuation of nearly 
$9,000,000 for the $10,000,000 each of preferred and common 
stock. It is highly probable that a road which has shown the 
steady advance in earnings that the Clover Leaf has, would 
readily sell on this basis, and it wai indeed reported that the 
road had been sold to the Vanderbilts for $25,000,000. 

The consent of a majority of both classes of stockholders 
would be necessary to the sale, and the basis of the division 
would be necessarily determined among the shareholders them- 
selves. In 1906 the certificates for the preferred ranged between 
$43 and $60 per share, and for the common between $25 and $40 
per share. 

Were these quotations made the basis of a division and were 
the road sold on the basis assumed, the preferred shareholders 
would receive about $56 per share, and the common about $34 
per share. Whether the preferred shareholders with a fairly 
good prospect of full dividends on their stock would sell on this 
basis is quite another question. It is not improbable that the 



TOLEDO, ST. LOUIS & WESTERN 695 

basis of the division would be determined by the amount of 
common stock held by the interests holding a majority of the 
preferred. 

Possibly it is due to the peculiarity which obtains that the 
preferred stock has not sold as high on the average as its condi- 
tion and its prospects seem fairly to justify. The outside investor 
will probably conclude that the preferred is hardly worth less 
than $50 per share, and that at anything like this figure, if bought 
and held, it should in the course of time show a profit. 

As to the common, it is a pure speculation. In 1903 it sold 
as low as $15 per share. In the meantime, the surplus shown 
has considerably more than doubled. If it could sell down to* 
$25 per share in 1906, on any very general recession in prices it 
might go lower; and if on the other hand it could be run up to 
$40 a share as in 1906, it ought to show a handsome profit if pur- 
chased at a low figure and the road met with no unexpected 
reverses. 



UNION PACIFIC SYSTEM 

Union Pacific Railroad, Oregon Shortline, Oregon Rail- 
road C& Navigation. 

From a rather formidable wreck in 1897, the Union Pacific has 
within a very few years become one of the richest, most aggressive 
and formidable of American railway companies. This has largely 
been due to the administrative genius revealed by its president, E. 
H. Harriman, who, up to the time that he became chairman of the 
executive committee of the reorganized company in 1898, had taken 
no very striking part in railway management. 

The Union Pacific "system" of today combines about 5,400 
miles of railroad, including the main line of the Union Pacific, ex- 
tending from Kansas City and Omaha to Ogden in Utah ; the Ore- 
gon Shortline and Utah Northern, the Oregon Railroad & Navi- 
gation and several subsidiaries. In addition to this, it owns what 
amounts practically to a controlling interest in the Southern Pa- 
cific, operating over 9,000 miles of main track ; which brings up the 
total of what is commonly known as the "Harriman system" to an 
aggregate of about 15,000 miles of road. It has also a half interest 
in the San Pedro, Los Angeles and Salt Lake, generally known, 
from its builder, as "Senator Clark's road." 

Beyond this, the Union Pacific has large holdings in the North- 
ern Pacific, the Great Northern, the Chicago & Alton, New York 
Central, etc. It has a large block of Atchison, and still more is sup- 
posed to be held by friendly interests ; and in 1906 it acquired half of 
the Pennsylvania Railroad's holdings in the Baltimore & Ohio ; like- 
wise, in 1906, interests friendly to the Harriman combination suc- 
ceeded in obtaining a majority of the board of the Illinois Central, 
ousting President Fish and substituting an executive for that road 
presumably friendly to the Union Pacific. 

If the assumption be made, though there is no public evidence 
for this, that the Harriman interests are dominant in Baltimore & 
Ohio, this brings the total of mileage controlled by these interests 
up to about 25,000 miles. In addition, the Southern Pacific owns 

(696) 






UNION PACIFIC 697 

control of the Pacific Mail Steamship Company, and likewise of an 
important line of steamers between New Orleans and New York. 
All this is the work of about eight years. 

History. 

The Union Pacific has had as interesting and checkered a 
career as any American railroad. With the discovery of gold in 
California and the rush of emigration to that state, the need of a 
transcontinental line was very soon felt; but the difficulties in build- 
ing a railroad across the Rocky Mountains were tremendous, and 
the project was delayed for some years. The demand for such a 
line became acute, however, with the outbreak of the Civil War, 
and about 1862 bills were passed through Congress looking to the 
construction of the line. In 1864 the Government offered heavy 
subsidies to a construction company, and under the direction of Gen. 
Grenville M. Dodge the work of building was begun. The Union 
Pacific was completed through to Ogden in 1869, there joining the 
Central Pacific, which had been constructed eastward from San 
Francisco, thereby affording a through line from the Missouri River 
to the Pacific. 

In 1880, the Kansas Pacific, running from Kansas City to 
Denver, and the Denver Pacific, from Denver to Cheyenne, w 7 ere 
absorbed, and a little later the Oregon Shortline, the Utah Northern 
and the Oregon Railway & Navigation were added. This brought 
the total mileage of the system up to about 8,100 miles. The Cen- 
tral Branch, from Kansas City to Pueblo, was leased to the Mis- 
souri Pacific, so that the actual operated mileage of the system in 
1892, was about 7,672 miles. 

The subsidies granted by the Government amounted to 12,600 
acres for every mile of road completed, and in addition it advanced 
from $16,000 to $48,000 per mile in bonds, according to the char- 
acter of the country through which the road ran. Although subse- 
quently these advances were made only a second lien on the prop- 
erty, and though the interest on these bonds was paid by the Gov- 
ernment, the load was heavy and steadily increasing. An enormous 
debt had been piled up in scandalous fashion, and dating from about 
1890 the company found itself in serious difficulties. In 1893 the 
road was thrown into hands of receivers, more to force a settlement 
with the Government, as many felt, than from actual necessity. The 
Government refused to lift its lien and various efforts at reorgani- 



698 UNION PACIFIC 

zation failed. But in 1898 the efforts of the reorganization com- 
mittee were successful and the new company took possession of the 
road, after paying the main government obligations in full, with 
interest. 

At the head of the new company were Jacob H. Schiff and Otto 
H. Kahn of the private banking firm of Kuhn, Uoeb & Co. ; the 
Gould interests were represented by George J. Gould and Winslow 
S. Pierce, the Standard Oil interests by James Stillman, President 
of the National City Bank, the Vanderbilt interests by President 
Marvin Hughitt, the Equitable Insurance Company by Henry B. 
Hyde, its President and Gen. Louis Fitzgerald. 

Horace G. Burt was chosen President, Winslow S. Pierce, 
Chairman of the Board, and E. H. Harriman, Chairman of the Ex- 
ecutive Committee. Mr. Harriman very soon became the domi- 
nating spirit of the road; the new management met the returning 
tide of prosperity with prompt energy, and very soon the income 
of the company warranted the great work of reconstruction which 
was begun in 1899. Although this involved the rebuilding of 
but a comparatively short portion of the line, it required something 
like $20,000,000 before it was completed. 

The chief part of this reconstruction was the straightening out 
and levelling of the line through the mountains, with the elimination 
of heavy curves and grades. There is a current impression that the 
Union Pacific had been built in a cork-screw fashion in the en- 
deavor to increase the subsidies as largely as possible. It is of in- 
terest therefore, to know that out of more than a thousand miles 
of main line the reconstruction involved only about thirty, and both 
President Harriman and his chief engineer, Mr. Berry, paid high 
tribute to the resource and skill with which Gen. Dodge had met 
and overcome the almost insuperable difficulties which faced him. 
Moreover, in the work of rebuilding, the engineer followed more or 
less the original line as laid out by Gen. Dodge, portions of which he 
had been compelled to abandon on account of the enormous expendi- 
ture involved. 

The effect of rebuilding was to reduce the gradient to a maxi- 
mum of 41 feet per mile, and to provide the Union Pacific with the 
most feasible route through that portion of the country which could 
be found. Subsequently the same aggressive policy of reconstruc- 
tion was applied to the Central Pacific line extending from Ogden 
to San Francisco. This work required among other things the 
building of the celebrated Lucin cut-off, carrying the road on piling 



UNION PACIFIC 699 

30 miles across an arm of the Great Salt Lake, one of the most 
remarkable engineering feats in American railroading. 

Of the old Union Pacific system about 5,800 miles were finally 
acquired by the new company, including eventually the Oregon 
Shortline, the Oregon Railroad & Navigation, etc., affording a 
through line from Kansas City and Omaha to Portland, Oregon. 
The other portions of the system, the Denver & Gulf, the Leadville 
& Gunnison, etc., were left to be subsequently reorganized as the 
Colorado & Southern. Later some portions of the road southward 
from the Salt Lake were sold to the San Pedro road, partly in re- 
turn for a half interest in that property, leaving a total of about 
5,400 miles. 

By 1901 the Union Pacific determined upon the purchase of the 
Central Pacific, then owned by the Southern Pacific, or failing that, 
the construction of a new line from Ogden to San Francisco. The 
death of Mr. Huntington, the controlling spirit of the Southern 
Pacific, left the way open for the purchase of practically a controll- 
ing interest in that road and the construction of a new line was 
abandoned. The acquisition of the Southern Pacific, together with 
a half interest in the San Pedro line gave the Union Pacific practi- 
cal monopoly over an enormous territory and this domination was 
accentuated by the purchase, as it is generally understood, of so 
large a block of Atchison stock that no rival interests could readily 
obtain a controlling interest in that road. 

In 1901 it was announced that Hill-Morgan interests, controll- 
ing the Great Northern and Northern Pacific, had purchased a ma- 
jority interest in the Burlington. As the Burlington came in direct 
competition with the Union Pacific, this was accounted an invasion 
of the Union Pacific's territory; the Harriman interests retaliated 
by endeavoring to secure control of the Northern Pacific. They 
succeeded in obtaining a clear majority of the stock of that road but 
not of the common, and were defeated by a proviso in the North- 
ern Pacific's articles that the preferred stock might at any time be 
retired at par. This the Hill-Morgan interests determined to do, 
at the same time making enormous purchases of stock in the market. 
The result of this was the Stock Exchange panic of 1901, when 
Northern Pacific shares rose as high as $800 and $1,000. 

In the subsequent formation of the Northern Securities Com- 
pany, the Union Pacific's shares were deposited along with the 
others and when this huge combination was dissolved by order of 
the courts, the Union Pacific received back, not its original North- 



700 UNION PACIFIC 

ern Pacific shares, but a pro rata of its Northern Securities hold- 
ings in shares of the Great Northern as well as the Northern Pa- 
cific. Owing to the tremendous rise in the value of these shares 
the Union Pacific's net profits from this transaction, taking what 
shares remained unsold on June 30th, 1906, at the then prevailing 
prices, and assuming that the balance had been sold at something 
like the same figures, were in the neighborhood of from seventy to 
eighty million dollars. 

This immense sum, combined with the equally heavy rise in the 
Southern Pacific shares and in its own earnings, put the Union Pa- 
cific in a position of almost unparalleled financial strength, leaving 
it at the close of the fiscal year of 1906 with the largest cash surplus 
in its treasury ever shown by any railroad in the world. 

The territory served by the Union Pacific lines has more than 
shared in the general recovery of business from the period of 1893 
and 1896, Colorado and other states being especially benefited by 
the development of the gold mining industry which has taken place 
in this period. Equally notable have been the results on the appli- 
cation of more scientific methods to agriculture, the introduction 
of top^soiling on the Western plains and irrigation into the more 
rainless districts. The result of this has been to place these Western 
states in a position of far greater financial solidity than they ever 
before enjoyed. 

Ownership. 

For some time after the reorganization, the Union Pacific was 
familiarly known as the Kuhn-Loeb road, but with the increased 
ascendency of Mr. Harriman in its affairs, this distinction has been 
dropped and Mr. Harriman is understood, practically speaking, to 
be in almost absolute control of its affairs. Jacob H. Schiff, head 
of Kuhn, Loeb & Co., and Otto H. Kahn, his partner, have retired 
from the directorate of the Union Pacific as they have from the 
directorate of all other roads, but without, it is understood, re- 
linquishing their large interests in Union Pacific. 

The determination of the Gould lines to construct the Western 
Pacific brought about a rupture between the Gould and Harriman 
interests, with the consequent retirement of the Gould representa- 
tives from the board. 

At the close of the fiscal year 1906 the Union Pacific's director- 
ate was made up as follows : 



UNION PACIFIC 701 

E. H. Harriman, president; Win. D. Cornish, vice-president; 
Robert S. Lovett, counsel ; A. J. Earling, prcs. of the Milwaukee & 
St. Paul ; H. H. Rogers, one of the three controlling- directors of that 
road ; Wm. G. Rockefeller, son of Wm. Rockefeller, and James Still- 
man, pres. of the National City Bank, representing the Standard Oil 
interests : Chas. A. Peabody, pres. of the Mutual Life Insurance Co. 
and attorney for the Astor estate, also associated with Mr. Harriman 
in affairs of the Illinois Central ; Henry C. Frick, a director in and 
understood to be one of the controlling spirits of the Atchison ; 
also interested in Reading, Norfolk & Western, etc. ; Robert 
Goelet, who also sided with Mr. Harriman in the Illinois Central 
fight ; Marvin Hughitt, President of the North Western ; David 
Willcox, former president of the Delaware & Hudson ; Oliver Ames, 
Boston ; P. A. Valentine, Chicago, and Joseph F. Smith, Salt Lake 
City, one of the heads of the Mormon Church. 

The executive committee was made up of Messrs. Harriman, 
Frick, Stillman, Hughitt and Lovett, the most notable change dur- 
ing the year being the entry of Mr. H. C. Frick into this controlling 
committee. It was this executive committee which suddenly jumped 
the Union Pacific's dividend from 6% to 10% in August, 1906. 

The Union Pacific reports the fourth largest number of stock- 
holders of any road in America, the three preceding being in order, 
the Pennsylvania, the Canadian Pacific and the Atchison. In 1905 
the number of record was 14,256. 

As the Union Pacific owns practically all of the stock of the 
Oregon Shortline and the Oregon Railroad & Navigation, the di- 
rectorate of these two companies is almost the same as that of the 
parent road. The executive committee of the Oregon Shortline is 
made up of President Harriman, Vice-President Wm. D. Cornish, 
R. S. Lovett, counsel, Oliver Ames, W. V. S. Thorne and P. A. 
Valentine. 

The executive committee of the Oregon Railroad & Navigation 
is made up of Messrs. Harriman, Cornish, Lovett, Wm. L. Bull, 
former President of the Wisconsin Central ; Maxwell Evarts, attor- 
ney for Union Pacific, and William Mahl, of New York, comptroller 
of the Union Pacific lines. 

Affiliations. 

Despite its large holdings in the Northern Pacific and Great 
Northern, the Union Pacific has no representatives on the boards 



702 UNION PACIFIC 

of these two roads. Neither has it any direct representative on the 
•Atchison, but H. H. Rogers is a member of the Atchison executive 
committee and H. C. Frick is also a director. Victor Morawetz, the 
chairman of the executive committee, is also a director in the Nor- 
folk & Western with Mr. Frick. 

Mr. Harriman's success in ousting Stuyvesant Fish from the 
presidency of the Illinois Central was taken to mean that thence- 
forth the Harriman interests would more or less dominate this road 
as well. Three of the Illinois Central directors, Chas. A. Peabody, 
President of the Mutual Life Insurance Co. and now very closely 
associated with Mr. Harriman, Robert W. Goelet and Mr. Harri- 
man, are also on the Union Pacific Board, and enough of the other 
directors sided with Mr. Harriman to elect a Harriman man president 
of the road. The Illinois Central joins the Union Pacific at Omaha, 
affording a fairly direct through line to Chicago, and it likewise 
meets the lines of the Southern Pacific at New Orleans in a very 
convenient way, and control of the road amply compensates for the 
loss of the Chicago & Alton to the Rock Island. 

The Union Pacific owns about one-quarter of the stock of the 
Chicago & Alton and up to 1906 its representatives were in control 
of that road and Mr. Harriman was chairman of the executive com- 
mittee. In this year control of the Alton definitely passed to the 
Rock Island interests. 

The Union Pacific works in close association with both the 
St. Paul and Northwestern and four of the Union Pacific directors 
are on the Northwestern board, including Messrs. Frick, Stillman, 
Ames and Hughitt. 

Aside from the directorates indicated, Mr. Harriman is on the 
Erie board and a member of its executive committee. Mr. Harri- 
man is likewise President of the Pacific Mail, and the Union Pacific, 
through its ownership of the Southern Pacific, dominates the affairs 
of that company, operating a large line of steamers from San Fran- 
cisco to Panama and to the Orient. With the opening of the 
Panama Canal, it is probable that the Pacific Mail, in conjunction 
with the Southern Pacific's steamship line on the Atlantic, will take 
a prominent part in transportation via that route. 

Edward H. Harriman, president, was born on Long Island in 
1848 and became a broker on the New York Stock Exchange; was. 
earliest interested in the Sodus Point Railroad, sold in 1884 to the 
Pennsylvania; was made a director in the Illinois Central in 1883 
and Vice-President in 1887, and in the absence of President Fish 



UNION PACIFIC 703 

was for a time acting president. For a time a small road bought for 
the Illinois Central was operated in his name personally; he was a 
member of the first board of the reorganized Union Pacific Railroad 
and made chairman of the executive committee May 23rd, 1898, 
serving continuously since ; was for a brief period in 1889 president 
of the reorganized Chicago & Alton, and subsequently for several 
years chairman of the executive committee of the Kansas City 
Southern; he became president of the Southern Pacific in 1902 and 
of the Union Pacific in 1904. He is understood to be largely inter- 
ested in the St. Joseph & Grand Island, is a director of the Wells 
Fargo Express Co. and practically in control ; also director in the 
Western Union Telegraph Co., etc., etc. 

Capitalization. 

Practically all the stock of the Oregon Shortline and the Ore- 
gon Railroad & Navigation have been exchanged for Union Pacific 
shares, so that in all save name, the three companies are one and 
are so treated in the reports of the road. 

Disregarding the stocks of the two subsidiary companies held 
in the Union Pacific's treasury, the capitalization of the system 
June 30, 1906, stood as follows : 

Common stock $195,446,900 

Preferred stock 99,544,100 

Auxiliary Cos 38,080 

Total stock $295,029,080 

Funded debt, Union Pacific 100,581,000 

Oregon Shortline, etc 79,472,000 

Oregon RR. & Nav 21,479,000 

Total capital $496,561,080 

Securities held 96,781,806 

Approx. net capital $399,779,274 

Approximate net capital, per mile $73,992 

Average miles operated 5,403 

Net earnings on net capital 8% 

Stock on net capitalization 73% 

Fixed charges on total net income. ... 33% 

Factor of safety 67% 



704 UNION PACIFIC 

It should be understood that in the makeup of the above tabu- 
lation, the value of the securities held is taken at their book cost 
and not at their market valuation. The latter was above $200,- 
000,000, so that if the market value of these securities were deducted 
from the gross capitalization of the road, this would bring the 
approximate net capital down to below $300,000,000, instead of 
$400,000,000. In other words, it would reduce the estimated capi- 
talization per mile by a full 25%. 

Still further, the books of the Union Pacific at the close of the 
fiscal year of 1906 showed cash and demand loans to the amount 
of $55,000,000, payments on account of the San Pedro line of $17,- 
300,000, and other advances which would easily reduce the net capi- 
talization of the Union Pacific (leaving ample working funds) to not 
much more than $200,000,000. 

For the purpose of comparison with other roads, therefore, the 
estimate of capital per mile for the Union Pacific would be less 
than $50,000. This would compare with $59,512 for the Northern 
Pacific, something like $42,362 for the Great Northern, $28,613 for 
the Canadian Pacific, $58,887 for the Atchison, and $64,426 for the 
Southern Pacific. 

Nominally, on the estimated capitalization shown above, the net 
earnings for 1906 showed 8%. But if the actual net capital were 
figured at say $250,000,000, the net earnings for 1906 were above 
12.5%. This figure would then compare with 9.6% for the Northern 
Pacific, about 10.1% for the Great Northern, 9.4% for the Canadian 
Pacific, 5.9% for the Atchison and 6.6% for the Southern Pacific. It 
will be seen, therefore, that, mainly in consequence of its speculative 
adventure in the stocks of other roads, especially the Southern Pa- 
cific and Northern Pacific, the actual net capitalization of the Union 
Pacific is lower than that of any other of the Pacific roads save the 
Canadian line, and for that matter lower than that of any other 
great railway system in the country with similar earnings. 

In the same way, if we take the net capitalization at $250,- 
000,000, about four-fifths of this capital would be represented by 
stock. In other words, cash and securities would more than wipe out 
all the outstanding funded debt of the system. The extraordinary 
financial strength of the Union Pacific is further evidenced in the 
fact that fixed charges in 1906 consume only about 33% of the 
total net income, leaving a nominal factor of safety on its under- 
lying securities of 67%. 



UNION PACIFIC 70S 

This showing is to some extent affected by the fact that in the 
income for the fiscal year of 1906, the report included dividends 
of $2,250,000 received from the common stock of the Southern 
Pacific, which was not declared until after the close of the fiscal 
year and not payable until October 1st. There would have been no 
thought of thus anticipating the dividends of the Northern Pacific 
or any other outside company, and it is not clear why it should have 
been in the case of the Southern Pacific. However, the elimination 
of this item would reduce the total net income of the system for the 
year by less than 8%, so that this would affect the estimate of the 
factor of safety but little. 

Equities Owned. 

The chief outside holding of the Union Pacific is $90,000,000 
par value of the common stock and $18,000,000 par value of the 
preferred stock of the Southern Pacific, constituting about 40% of 
the total stock. The Southern Pacific in 1906 showed fixed charges 
consuming only 50% of the total net income and after the payment 
of the full 7% on the preferred stock, the surplus amounted to 
about 10% on the $197,000,000 of common stock. This left a wide 
margin of safety for the preferred. The preferred is redeemable at 
115 and therefore its value cannot greatly exceed this figure. 

On the other hand, the road was heavily charged, as for many 
years previously, for maintenance, so that the surplus showing was 
conservative rather than otherwise. On a 5% basis, with such a 
showing, Southern Pacific common should be worth well around 
Dar, so that the aggregate of the Union Pacific's holdings of this 
stock would be worth in normal times above $110,000,000, or con- 
siderably in excess of the amount at which all the Union Pacific's 
securities are carried on its books. This valuation of the Union 
Pacific's stock would represent a profit to the Union Pacific perhaps 
in excess of $40,000,000 above the original cost. 

The next largest of Union Pacific's holdings was $15,436,400, 
par value of Great Northern stock, obtained with the dissolution of 
the Northern Securities Company. If this stock were taken at the 
average price of Great Northern through 1906, before the distri- 
bution of the ore certificates, this stock would have been valued at 
above $45,000,000. 

Similarly, if its $13,350,800 par value of the Northern Pacific 
were taken at the average price of that stock throughout 1906 up 

45 



706 UNION PACIFIC 

to the time of its new issue of stock, this item would represent a 
further value of above $27,000,000. 

The Union Pacific held on June 30, 1906, preferred stock in 
the Chicago & Alton to a par value of $10,343,100, worth in the 
market about three- fourths of this sum, or around $3,000,00. Other 
large holdings were $8,750,000 par value, representing seven-eighths 
of the capital stock of the Occidental & Oriental Steamship Co., $2,- 
400,000 par value of the Pacific Express Co., $5,000,000 par value 
of the Union Pacific Coal Co. (the entire issue) and bonds of other 
companies of a par value of $18,849,200. Taking the bonds at 
somewhere near par, we should then have a valuation of the Union 
Pacific's securities as follows : 

Southern Pacific, Preferred $20,000,000 

Southern Pacific, Common 90,000,000 

Great Northern 45,000,000 

Northern Pacific 27,000,000 

Chicago & Alton 8,000,000 

San Pedro Line, advances 17,300,000 

Other stocks (est.) 10,000,000 

Bonds 18,000,000 

Total $235,300,000 

These securities were carried on the books at their net cost 
of $96,781,806, plus $17,300,000 advanced to the San Pedro line. 

During the year, the Union Pacific sold off Great Northern, 
Northern Pacific and Northern Securities stock of an approximate 
market valuation (price obtained not stated) of between $60,000,000 
and $70,000,000. As the entire cost of the Northern Pacific's stock, 
bought by the Union Pacific in 1901, could not have been very 
greatly in excess of this sum, the entire remaining stock, to an 
approximate market value of about $75,000,000, represented very 
nearly that much clear profit as the result of this Napoleonic specu- 
lation. Combining the profit from the purchase of the Southern 
Pacific with this figure, it will be seen that the Union Pacific had 
gained in stock ventures in excess of $100,000,000, equivalent to 
50% or 60% of the entire amount of Union Pacific stock outstand- 
ing. This is railroading a la mode, and it was largely this which has 
made the Union Pacific financially the strongest railway organization 
in the United States. 






UNION PACIFIC 707 

In the fall of 1906 it was announced that the Union Pacific 
had purchased from Kuhn, Loeb & Co. about one-half of the Penn- 
sylvania's interest in the Baltimore & Ohio, and from the Interstate 
Commerce Commission's investigation in the following winter, it 
appeared that other very heavy purchases had been made. The par 
value and cost of these purchases was as follows : 

Par Value. Cost. 

Illinois Central $18,623,100 $32,618,883 

Railroad Securities Co 5,313,800 8,823,144 

St. Joseph & Grand Island 5,082,200 2,022,540 

Fresno City Railway Company 495,650 106,410 

Pacific Fruit Express Co 1,200,000 

(10% subscription to $12,000,000 

par value) 

Atchison 10,000,000 10,395,000 

Baltimore & Ohio 43,200,600 48,445,709 

(10% subscription to 18,450 shares 

pfd. and 9,225 shares common 276,750 

Chicago & Northwestern 2,572,000 5,303,673 

New York Central 14,285,745 19,634,324 

Northern Pacific 124,580 

(5% subscription to 24,916 shares 

capital stock) 
Total cost, not including unpaid subscriptions $128,641,018 

These purchases were generally at the prevailing high prices 
of 1906 and in the heavy slump in security values, culminating in 
the stock panic of March, 1907, the Union Pacific's purchases 
showed, with the rest, a heavy decline in value, amounting, at the 
lowest prices, to approximately $25,000,000, or about 20% on the 
one hundred and twenty-eight millions which the stocks cost. 

This was a heavy fall and revealed clearly enough the diffi- 
culties and dangers which beset the large holding companies. Their 
purchases may show large losses as well as large gains, but it is to be 
noted, as the result of these purchases, and the corresponding sale 
of Northern Pacific and Great Northern securities, the Union Paci- 
fic's item of "other income" would show, if taken for a full year, an 
increase of around two and one-half million dollars. In other words, 
the Union Pacific sold off high-priced stocks on which the yield was 
relatively low and by re-investing the money so obtained, very con- 
siderably augmented its total net income. 

- It is to be noted further that the prices reached in March of 
1907 were really very low prices, as compared with the yield, since 
in general a standard list of railway stocks showed a higher interest 



708 UNION PACIFIC 

return at these prices than at any time since the panic year of '93, 
and were actually at the same level as at the lowest of that year. 
Barring, therefore, anything short of a prolonged business depres- 
sion, it would appear that the loss shown on the Union Pacific's 
investments was largely a paper loss, and that while some of the 
purchases may have been at exceptionally high prices, the effect of 
these purchases was substantially to increase the income of the road. 

The Railroad Securities Company, included in the table given 
above, is a holding company, owning $9,500,000 par value of Illinois 
Central stock, so that combining the Union Pacific's purchases, it 
would appear that it had control of approximately $28,000,000 of 
Illinois Central stock, or, roughly, about one-third of the total. 

The purchase of Baltimore & Ohio stock amounted to only 
about 12% of the total capital stock outstanding. But this purchase 
was looked upon as indicating an intention on the part of the Union 
Pacific, or at least of the Harriman-Kuhn, L,oeb interests, to form a 
complete transcontinental chain from the Atlantic to the Pacific. 
Control of the Baltimore & Ohio would of course mean a half in- 
terest in the control of the Reading, likewise the Central Railroad 
of New Jersey. Mr. Harriman had been a director in the Baltimore 
& Ohio since it was taken from the hands of the receivers, and a 
member of the expenditures committee, which laid out $30,000,- 
000 in the rebuilding of the road. It was moreover noted that the 
Baltimore & Ohio closely parallels a large part of the eastern Gould 
lines, the Western Maryland- Wheeling & Lake Erie- Wabash system, 
and that it was precisely with the Gould lines, on account of the 
building of the Western Pacific, parallelling the Central Pacific, 
that the Harriman lines found themselves most at war. If the 
Union Pacific interests are able to dominate the Illinois Central, 
this would afford the connecting link both between the Baltimore & 
Ohio and the eastern terminals of both the Union Pacific and South- 
ern Pacific. But whether or no this be the intent, there were no 
changes in the Baltimore & Ohio board in the ensuing annual elec- 
tion in 1906, and Mr. Harriman stood then as the only direct repre- 
sentative of the Union Pacific interest in the directorate. 

All told, the Union Pacific derived from its investments in 
other companies and those included in the Union Pacific system a 
total in 1906 of about seven and one-half million dollars ; or in- 
cluding rental of steamships, etc., over $8,000,000. This on a 4% 
basis would afhx the value of its holdings at around $200,000,000. 
As a matter of fact, the Union Pacific received valuable rights 



UNION PACIFIC 



709 



during 1905 from the Great Northern and there were other rights 
accruing from the Great Northern and Northern Pacific in 1906, 
not to speak of the Great Northern's distribution of Ore Certifi- 
cates, so that the Union Pacific's income from these holdings was 
in reality considerably larger. Including the value of undistributed 
equities, the estimate of $200,000,000 as a valuation of the Union 
Pacific's outside securities would hold on a basis even better than 
4%. 

While the company's stock market speculations have been 
enormously successful, yet taken as a whole the interest return on 
the investment is hardly so large as the dividend that the Union 
Pacific pays on the stock issued to secure capital for the purchases. 
In other words, with the exception of its investment in Southern 
Pacific, the Union Pacific is earning much more from the capital 
invested in its own road than from that invested outside. 

Increase of Capitalization. 

The consolidation of the present Union Pacific system had 
been very nearly completed by 1900, so that the main changes in 
the capitalization through the intervening six years was due to the 
conversion of the $100,000,000 of convertible bonds into common 
stock and the addition of about $50,000,000 to the funded debt. 
The various items show as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900.... 
1906.... 


$95,645,000 
195,446,900 


$98,956,400 
99,544,100 


$149,473,000 
201,532,000 


$344,074,400 
496,523,300 


$38,308,420 
66,879,141 



Increase over six years: Total capital, 44%; gross earnings, 74%. 

By far the larger part of this increase in capital was employed 
in the purchase of the Southern Pacific, Northern Pacific and other 
stocks, so that in reality the actual increase of capital employed in 
the Union Pacific proper has been very slight, probably not over 
15% ; thus the comparison between increase of capital and in- 
crease of earnings becomes very much more notable than the table 
would indicate. 

In 1907, the funded debt was increased by the issue of $75,- 
000,000 4% 20-year convertible bonds, redeemable after July 1, 
1912 at 102^, and convertible into common stock at any time up to 
July 1, 1917 at 175. Sold at below 90, this issue netted the Union 
Pacific about $66,000,000. 



710 UNION PACIFIC 

Character of Traffic. 

The Union Pacific's very full reports do not itemize the average 
tonnage. It may be taken for granted, however, that a very con- 
siderable proportion of it is through traffic, since the average dis- 
tance carried for each ton was in 1906, 410 miles and the average 
train load was 509 tons, both of which indicate an exceptionally 
long haul. The Harriman policy has not been apparently the build- 
ing of a great many small feeders and the development of local 
traffic, with concentration upon main track. 

The obvious result of this policy would be to make the Union 
Pacific very much less dependent for its prosperity upon local con- 
ditions. In view of the frequent criticisms of this policy, it is to be 
noted that there is perhaps no section of the country more subject 
to great ups and downs than the western plains which the Union 
Pacific traverses. While this territory has been marvelously pros- 
perous in recent years, it has not always been so and similar periods 
of adversity may come again. Buttressed with its long haul 
traffic, the Union Pacific is in a much stronger position to meet 
such a contingency than it otherwise might be. 

Passenger traffic in 1906 represented a little under 20% of the 
gross traffic receipts. The gross earnings from the water lines were 
$4,402,400. 

Stability of Earnings. 

By 1891, the gross earnings of the Union Pacific system, cover- 
ing then nearly 7,700 miles of road, reached a gross of $44,000,000. 
After the appointment of the receivers in '93, the system was 
practically dismembered so that comparisons for the succeeding 
years are not available. What the slump of '93 meant, however, is 
sufficiently evident in the following comparisons of the earnings of 
the original Union Pacific road. This was the 1,800 miles of main 
track, extending from Omaha to Ogden, with some branches, and 
was the main line of the system. With a very nearly constant 
mileage, the earnings from 1893 up to the reorganization, showed 
as follows : 

1893 $19,743,748 

1894 15,263,912 

1895 14,958,537 

1896 14,083,348 

1897 14,944,477 

1898 17,384,017 



UNION PACIFIC 



711 



Since the reorganization the earnings of the system, including 
at first the Oregon Short Line and eventually the Oregon Railroad 
& Navigation, have been as follows (Rail earnings only) : 



Year 


Miles Operated 


Gross Earnings 

(Not including 

water lines) 


Per Mile 


1898-9 


4,883 
5,427 
5,543 
5,711 
5,762 
5,353 
5,358 
5,403 


$33,647,032 
38,308,420 
42,688,835 
46,639,629 
50,216,248 
54,264,878 
58,756,845 
66,879,141 


$6,890 


1899-0. . 


5,058 


1900-1 


7,701 


1901-2 

1902-3 


8,166 
8,715 


1903-4 

1904-5 

1905-6 


10,137 
10,967 
12,376 



The average rates received by the Union Pacific in 1906 were 
considerably higher than those obtained by the Northern Pacific and 
Great Northern, lower than those of the Southern Pacific, and about 
the same as the Atchison. For the several roads, the average rates 
were : 



Southern Pacific 1.02 cents 

Atchison 93 " 

Union Pacific 91 " 

Northern Pacific 83 " 

Great Northern 79 " 

Canadian Pacific 74 " 

It will be seen that the average rate on the Great Northern, for 
example, was 13% less than the Union Pacific, or actually .12c. less. 
This average rate on the Union Pacific's total freight traffic for the 
year would mean a difference in its gross receipts of over $6,000,000. 
Supposing the traffic of the two roads more or less equivalent, this 
fact may be read in two ways, either that if less prosperous times 
were to force a reduction in freight rates, the Great Northern is 
nearer to bedrock, or that the Union Pacific could possibly better 
stand a considerable reduction than its Northern rival. 

It is to be noted that the Union Pacific's earnings per mile since 
1900, since which time the mileage has but little changed, have risen 
steadily and rapidly, reaching in 1906 the high figure of over $12,000 
per mile. This is more than double 1900, the first year of the 
operations of the system as it stood in 1906. This is a very remark- 
able showing. 



712 



UNION PACIFIC 
Maintenance. 



The following table shows the amounts appropriated each year 
for the up-keep of the road in comparison with the average of the 
five other Pacific lines, and also the Burlington. The traffic density 
shown for the first year, 1901, is as to all freight carried, the 
remaining years show revenue freight only. 



Year 


Traffic Density 


Maintenance per Mile 


Total 




Way 


Equipment 




1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


*527,806 
608,548 
650,899 
757,176 
899,992 
990,815 


$975 
1,041 
918 
1,213 
1,370 
1,519 


$805 
800 
1,045 
1,142 
1,285 
1,222 


$1,780 
1,841 
1,963 
2,355 
2,655 
2,741 


Average. . . . 


739,206 


$1,173 


$1,049 


$2,222 



* All freight. 

Miles extra track, 168. 



Great Nor. 


650,321 


960 


594 


1,554 


Nor. Pac 


729,102 


1,300 


791 


2,091 


Atchison 


557,005 


1,123 


1,113 


2,236 


Burlington 


580,024 


1,104 


1,032 


2,136 


Can. Pac 


458,589 


850 


1,002 


1,852 


So. Pac 


594,898 


1,446 


1,246 


2,692 



It is doubtful if six other roads, occupying the same general 
territory, and with more or less of the same character of traffic 
could be found which would show so wide a discrepancy in main- 
tenance charges. The average of the six years for the Union Pacific 
is nearly $700 per mile annually above that of the Great Northern 
and about $470 below that of the Southern Pacific. With an average 
traffic density nearly one-third less, the annual appropriations of the 
Atchison and the Burlington were about the same as the Union 
Pacific. It is very well known that both Burlington and Atchison 
have for a number of years charged maintenance very heavily, 
while the Great Northern's charges have been comparatively light. 

Comparisons for the year of 1906 of these roads are of es- 
pecial interest, and the following table shows the same items for 
each road for this year : 



UNION PACIFIC 



713 





Traffic Density 


Way 


Equipment 


Total 


No. Pac 

Gt. Nor 

Atchison 

Burlington 

So. Pac 

Union Pac. . . . 


971,344 
835,342 
693,873 
713,568 
678,554 
990,815 


$1,387 
1,092 
1,479 
1,271 
1,775 
1,519 


$1,098 
816 
1,271 
1,533 
1,554 
1,222 


$2,485 
1,908 
2,750 
2,804 
3,329 
2,741 



It will be seen that in 1906 the roads, in respect to maintenance, 
preserved much the same order as in the averages for six years ; 
in other words that each road had a distinct policy in this regard and 
followed it without change. Thus, traffic density considered, the 
Southern Pacific's, the Atchison's and the Burlington's charges were 
very high while the Great Northern's again were comparatively low. 
Had, for example, the Union Pacific kept its books in the same 
fashion as the Great Northern, its maintenance charges would have 
been perhaps $500 per mile less than they were, which on 5,400 
miles of rail would have meant a difference in the surplus of around 
$2,700,000. Compared with the Burlington and the Atchison, the 
difference would have been the other way, though not to the same 
extent. 

It is evident from the above, that the Union Pacific's main- 
tenance charges were liberal and that its astonishing surplus was 
not obtained by skimping the items of renovation. 

Improvements from Earnings. 



In addition to these liberal charges, the Union Pacific has 
followed the general example of successful railways in setting 
aside considerable sums annually for betterments. These appro- 
priations have been as follows : 

1900-1 $1,500,000 

1901-2 2,000,000 

1902-3 2,000,000 

1903-4 3,500,000 

1904-5 4,479,165 

1905-6 4,200,000 

Renewal Fund charged to Operating 

Expenses 2,206,610 

Total $19,885,775 



714 



UNION PACIFIC 



This aggregate of nearly $20,000,000 compares with similar 
appropriations of $15,130,510 of the Great Northern, $20,102,165 by 
the Northern Pacific, $15,859,500 by the Atchison, none whatever 
by the Burlington. 

Surplus Earnings. 

After the liberal maintenance charges shown above, but before 
deducting special appropriations for betterments the Union Pacific's 
surplus from 1901 has shown as follows : 







Dividends 


Per cent. 


Dividends 


Average 


Year 


Surplus 


Paid on 


Earned on 


Paid on 


Price (Cal- 






Preferred 


Common 


Common 


endar year) 


1900-1.... 


$13,157,780 


3£ 


9.6 




103 


1901-2.... 


14,501,594 


4 


10.1 


3* 


103 


1902-3.... 


15,276,150 


4 


10.4 


4 


82 


1903-4. . . . 


16,596,548 


4 


11.6 


4 


92 


1904-5. . . . 


22,785,053 


4 


11.3 


4* 


129 


1905-6. . . . 


33,971,283 


4 


15.3 


8 


167 



The surplus for 1906 includes $2,206,680 set aside as a reserve 
fund for renewals (included in operating expenses) and likewise 
the proceeds from the 2^% dividend on the Southern Pacific com- 
mon stock amounting to $2,250,000, which, however, was not de- 
clared or paid until after the close of the fiscal year. Attention 
to this latter bit of unusual bookkeeping has already been drawn. 

Apropos of the very unexpected increase of the Union Pacific's 
dividend in 1906 from a 6% to a 10% rate, it is of interest to note 
that in 1905 the surplus earned on the common stock amounted to 
about 11%, while the dividend for the fiscal year was 4^2%, while 
in 1906, on a showing of about 15% on the common stock, the divi- 
dend for the year was actually 8%, and for the latter half of the 
year at the rate of 10%. 



Dividend Record. 



Dividends on the old Union Pacific Company were a rather un- 
certain affair, though 6% was paid in 1880 and 7% in 1882 and 1883. 
However with 1884, they ceased. The payments by the reorganized 
company have been as follows : 



UNION PACIFIC 715 

Common. Preferred. 
Year. °/o % 

1898 \y 2 

1899 zy 2 

1900 3y 2 4 

1901-4 4 4 

1905 \y 2 4 

1906 8 4 

The Balance Sheet. 

The financial status of the Union Pacific at the close of the 
fiscal year 1906 was undoubtedly the most remarkable ever shown 
by an American railway, and for that matter any other. There 
were — 

Current assets amounting to $64,013,012 

Current liabilities 20,419,100 

Leaving credit balance of $43,593,912 

In addition to the above there were payments on account of the 
San Pedro line of $17,300,000, advances for new construction $22,- 
836,611, purchases of ocean steamships $5,126,796. None of these 
items contributed to the revenues for the year. 

The actual amount of assets was considerably over $100,000,- 
000, offset by less than $25,000,000 of current liabilities. The figures 
are so enormous as almost to escape appreciation. It is quite certain 
that no railway in America ever before had on hand practically 
$55,000,000. 

Investment Value. 

If in 1906, the Union Pacific could have sold all its securities 
at market prices, cashed in its advances to other lines and called its 
loans — in other words, reduced itself to a plain simple railway, it 
would have had on hand sufficient to retire all its outstanding bonds, 
and its preferred stock, and had left ample working capital. This 
would have left it with 5,400 miles of track, earning gross upwards 
of $12,000 per mile and capitalized at a little less than $200,000,000. 
It would have had, above operating expenses and taxes, including 
liberal maintenance, $30,000,000, or sufficient to pay the 10% divi- 
dend on the common stock and have left $10,000,000 for improve- 
ments and reserve. This is the simplest statement that can be made 
of the present financial strength of the company. 



716 UNION PACIFIC 

The only important new line which the Union Pacific is building 
is that from Portland to Seattle, affording it a Northern outlet to 
Puget Sound shipping where it was previously blocked. Its equity 
in the Southern Pacific is likely to increase in value rather than 
diminish, and the eight years of the reorganized company have 
shown management of the highest efficiency and of extraordinary 
foresight. To take a bankrupt road and build it up in this brief time 
to a position of such financial strength was not the work of chance ; 
and while the period under view was for the West one of un- 
parallelled prosperity, there seems small reason to suppose that a 
turn of tide would not be met with the same ability and foresight, 
but the company is in a position to retrench expenditures without 
crippling the efficiency of the line. 

It would seem, therefore, that nothing short of a general busi- 
ness collapse or hostile legislation, arbitrarily reducing rates to an 
unprofitable point, would impair the company's ability to continue 
its 10% dividend. On a basis as solid as that of any railroad in 
the country, the stock should therefore sell at the same rate as other 
solid dividend stocks, which is to say, that if the prevailing yield 
of railway shares were 5%, the stock should average around $200. 
If the high money rates were to decline, and stocks sell generally 
on a 4% basis, Union Pacific would be worth around $250 per 
share. 

Against this, two factors might militate somewhat. The one is 
that with less prosperous conditions, a 10% dividend on a stock 
that a few years ago was to be picked up for one-tenth of its 
present value, is likely to stimulate a demand for a heavy reduction 
in rates. The other was the manner in which the dividend of 1906 
was declared. Not in long years is there to be found an instance 
of a railroad jumping its dividends more than 50% at a stroke. In 
the summer of 1906 some increase in Union Pacific's dividend was 
anticipated but so little was the advance to a 10% basis expected 
that it brought forth what might be called an international outcry 
of astonishment. Furthermore, in justifying this advance, the 
management stated that the dividend was to be considered as equiva- 
lent to 6% from the regular earnings and 4% from investments. 
To do this, it was needful to include the proceeds from the 5% 
dividend on the Southern Pacific common stock declared after the 
close of the fiscal year. This was quite an unusual procedure. 

It was a very natural thought, and this thought very freely 
expressed, that a management inclined to the unexpected, as this 



UNION PACIFIC . 717 

dividend certainly was, might equally produce the unexpected in 
another direction, were conditions less roseate. 

It is quite possible that on account of these considerations, 
Union Pacific will for sometime sell rather under than over what 
earnings and conditions would amply justify. But this is by no 
means certain, on account of the tremendous financial strength 
of the controlling interests of the road, and the powerful influence 
which they exert in the general course of the market. 

In the course of its rise to its present position, the Union Pacific 
has undergone some extraordinary fluctuations, even after its 
management had begun to show splendid results. It sold as low 
as $44 per share in 1900, rising to $133 the year following, a jump of 
almost 200%. In the slump of 1903 it sold down to $65 per share, 
even in the face of very large earnings, and in 1905 was still to be 
bought for $113 per share. In 1906 it sold from a low level of $139 
in May to $195 in Sept., subsequently dropping to $120, on March 
14, 1907. This was very near to the low level of 1905, when the 
dividend was raised from a 4% to a 5% basis. While this spec- 
tacular fall in price was not as heavy as in some other stocks, no- 
tably the Hill stocks, it still serves to indicate that hippodrome divi- 
dends do not necessarily make for stability of price. 

Union Pacific preferred is limited to 4% and may be considered 
as solid a preferred stock as is to be found on the list. It sold above 
par in 1905, declining as low as $92 in May of 1906. It sold as low 
as $84 a share in 1903. Its price will obviously fluctuate, like the 
bond list, with the prevailing money rate. 

The New Convertibles. 

In May of 1907 the stockholders were offered the privilege of 
subscribing to $75,000,000 par value of the new 4% 20-year con- 
vertible bonds at 90, and to the extent of 25% of their holdings. 
The bonds are convertible at any time before July 1st, 1917, into 
common stock at $175 per share and are redeemable at the option 
of the company after July 1st, 1912 at 102^. Purchased at the 
subscription price of 90, the equivalent conversion price for the 
common stock would be 157 y 2 . This was slightly above the pre- 
vailing prices for Union Pacific at the time. 



VANDALIA RAILROAD. 

The Vandalia is one of the subsidiary Pennsylvania lines 
which carries the Pennsylvania system westward from Indianap- 
olis, and southward from South Bend and Butler, Ind., to Vin- 
cennes and St. Louis. The present company is a new one, hav- 
ing been formed at the close of 1904 by the consolidation of the 
Terre Haute and Indianapolis, the St. Louis, Vandalia and Terre 
Haute, the Terre Haute and Logansport, the Logansport and 
Toledo, and the Indianapolis and Vincennes. It is therefore a 
feeder for the Panhandle and the Pennsylvania Lines west. 

Through the leasing of the Terre Haute and Peoria Railroad 
to the Terre Haute and Indianapolis, the line gained an addi- 
tional 145 miles, bringing up the total of the operated to 824. 

All of the consolidated roads were small lines owned by the 
Pennsylvania Company, and of the merger company's stock — 
$14,650,000 — the Pennsylvania Company owned in 1906, $11,633,- 
430, and the Panhandle $541,600, or more than two-thirds. The 
directorate is made up chiefly of Pennsylvania Company directors, 
and the affiliations of the Vandalia are naturally those of the Penn- 
sylvania lines. 

Capitalization. 

On January 1st, 1907, the capital account stood as follows: 

Common stock $14,139,930 

Stocks of merger lines 509,616 

Total stock $14,649,546 

Funded Debt 14,100,000 

Nominal capital $28,749,546 

Rentals cap. at 4% 9,008,050 

Approx. gross capitalization.... $37,757,596 
Securities held 228,235 

Approx. net capitalization $37,529,361 

(718) 



VANDALIA 719 

Approx. cap. per mile $45,301 

Average miles operated 828 

Net earnings on net capitalization 5.9% 

Stock on net capitalization 40% 

Fixed charges on Total net Income 54% 

Factor of Safety 46% 

It will be seen that the average capitalization per mile for a 
road earning $10,754 per mile was not low ; for 1906 the net 
earnings showed 5.9% on the estimated net capitalization, which 
is rather about the same as that of the other Pennsylvania Lines 
West. 

The stock represented 40% of the estimated net capitali- 
zation, and the Fixed Charges consumed a little over half of the 
total net income, leaving an ample Factor of Safety for the obli- 
gations of the road. 

The company has practically no holdings in other companies, 
and therefore no equities. 

Traffic and Earnings. 

Of the gross earnings of 1906 passenger traffic made up about 
25%, of the total; and of the freight tonnage, bituminous coal 
was the chief item. Coal and coke combined made up about half 
of the gross tonnage. Farm products and animals made up 
14%, lumber 9%, manufactures, 18%. 

In the following table the operations of the separate roads 
have been grouped together to make up items for 1904, while the 
columns for 1905 and 1906 represent the operations of the Van- 
dalia company. 



1904 



Gross earnings 

Operating expenses and taxes. . . . 

Net earnings 

Other income 

Total net income 

Fixed charges, exclusive of taxes 
Surplus 



^8,261,781 
6,443,055 
1,818,725 

289,916 
2,108,642 

857,253 
1,251,389 



1905 



$7,845,222 

6,150,052 

1,695,168 

34,271 

1,729,439 

743,973 

985,465 



1906 



$8,904,859 
6,931,890 
1,972,968 
81. 905 
2,054,874 
994,322 
1,060,552 



The gross earnings of the combined companies for 1904 
were slightly in excess of those of 1905, owing to the increased 
traffic due to the St. Louis Fair. The Other Income (and the sur- 
plus) shown includes $246,336 of accumulated dividends paid in 
that year. 



720 



VANDALIA 
Maintenance. 



The maintenance charges for the combined roads for 1904 
and the consolidated company for 1905 and 1906 compared as 
follows : 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1904 


763,581 

862,064 

1,036,588 


$1,115 
1,254 
1,501 


$1,757 
1,630 
2,021 


$2,872 


1905 


2,884 


1906 


3,522 






Average 


887,411 


$1,290 


$1,802 


$3,092 



In addition to the amounts thus expended, $325,000 was 
transferred to begin an extraordinary expenditure fund in 1905, 
and $400,000 was added from the surplus of 1906. 

Surplus. 

Before the extraordinary expenditure fund had been charged 
off, the surplus for the year 1905 for the new company amounted 
to $985,465, which was equivalent to 6.6% on the capital stock. 

This enabled the company comfortably to pay a 4% divi- 
dend, create its improvement fund, and pass $96,000 to the credit 
of Profit and Loss. For 1906 the surplus shown was $1,060,552, 
equivalent to 7.2% on the capital stock; 4]/ 2 % was paid in divi- 
dends. 

The balance sheet at the close of 1906 showed 

Current Assets $3,798,462 

Current Liabilities 1,753,738 

Leaving a working balance of $2,044,724 

The company had on hand $2,765,248 cash and the balance 
to credit of Profit and Loss at the close of the year was $1,147,- 
467; the latter figure was a slight decrease from the previous 
year; 

Since the Pennsylvania owns two-thirds of the stock of the 
company, the floating supply is of no value save for the purpose 
of investment. On the basis of two years' showing it is easily 
able to pay \y 2 or 5% and still set aside a nearly equivalent 
amount for improvements. 

Forming the western end of an important system, the traffic 



VANDALIA 721 

of the road should grow with the system, and the earnings of 
the latter showed an enormous gain in the years of 1905-7 in 
consequence of the immense improvements which have been 
undertaken and which are still under way. 

As a solid 4% stock, with excellent prospects, placed on a 5% 
basis in 1907, Vandalia should readily sell at between $80 and $100 
per share. It sold at the latter figure when it was first listed on the 
exchange in 1905, receding to $85 in the same year. The highest 
and lowest quotations for 1906 were $83 and $85, respectively. 

At these figures, with money at 4%, the stock should present 
an attractive purchase, but in 1906 rates of money were very 
much higher, which is sufficient to account for the quotation 
shown. 



46 



WABASH RAILROAD. 

The Wabash is the connecting link of the Gould railways 
between the recently acquired Western Maryland and the exten- 
sive system of southwestern railways dominated by the Missouri 
Pacific. The main line of the road extends from Toledo, Ohio, 
westward to St. Louis and Kansas City, with branching lines 
to Omaha and Des Moines, la. There is another line from De- 
troit through to Chicago, and from Chicago to St. Louis, and 
trackage rights over the Grand Trunk extend the road eastward 
from Windsor, Ontario, to Buffalo. Connections with the West- 
ern Maryland are established through the Wheeling and Lake 
Erie running eastward from Toledo, and the Wabash-Pittsburgh 
Terminal Railway, which carries the Gould lines into Pittsburgh. 

Occupying very much the same territory as crack roads like 
the Lake Shore, the Michigan Central, and the Chicago and 
Alton, the Wabash has always occupied a distinctly secondary 
position. For a long period and up to very recent years it was 
more of a football for the stock market than a railroad, and its 
conduct was characterized by every form of scandal and stock 
jobbery which tended to bring American railroading into dis- 
repute in former years. With the abrupt change in the Gould' 
policy, which came with the advent of the younger generation 
to power, a solid upbuilding of the road was begun. Heavily 
handicapped by an enormous load of debt and a form of capi- 
talization that hindered the sale of new securities, this was not 
an easy task. 

Under the refunding plan brought forward in 1906 these 
hindrances bid fair to be removed, and it may be that a new era 
for the Wabash has begun. 

History. 

The present Wabash represents the combination of the old 
Wabash Railroad with the St. Louis, Kansas City and North- 
ern. The old Wabash represented the reorganization of the 
Toledo, Wabash and Western, which was again an amalgamation 

(722) 



WABASH 723 

of many small lines. After the merger of the St. Louis, Kansas 
City and Northern, the Company was known as the Wabash, 
St. Louis and Pacific, and extended from Toledo, on Lake Erie, 
to Kansas City and other points. In 1883 the system was leased 
to the Iron Mountain under an outrageous contract, subsequently 
surrendered, and in 1884 the road went into the hands of a 
receiver and stayed there for five years. In 1889 it was foreclosed 
and taken over by the present company, but the reorganization 
failed to scale down its load of debt, and under this load it 
dragged along in a hopeless sort of way until it was taken in 
hand by the newer Gould influences. The last ten years have 
witnessed a steady upbuilding of the property. In 1895 Joseph 
Ramsay, Jr., was made vice-president and general manager, and 
in 1901 president, continuing in that position until 1905. Under 
his administration the earnings per mile rose from $6,600 to 
$9,900, a gain of 50%, in a highly competitive territory. During 
all this time all of the surplus earnings were turned back into 
the road. 

The Wabash in 1906 operated a total of 2,517 miles, of which 
275 represented trackage rights from Detroit to Buffalo over 
the Grand Trunk Railway. In addition to this mileage, the 
system has in the subsidiary Wheeling and Lake Erie, 448 miles 
and in the new Wabash-Pittsburgh Terminal road, 60 miles 
more. The Wabash owns all the stock of the Wabash-Pittsburgh 
Terminal Company, which in turn owns a clear controlling in- 
terest in the AVheeling and Lake Erie, thus bringing the total 
mileage of the system up to over 3,000 miles. The completion 
of the West Virginia Central & Pittsburgh will connect the Wabash 
with the Western Maryland, so that it will have a direct outlet to 
seaboard, and its Western connections with the Gould system ensure 
it a steady traffic from the West. 

Ownership. 

The road has been to all intents and purposes a Gould prop- 
erty since the merger of 1879, and very distinctly since the 
reorganization of 1889. The directorate of 1906 was made up 
of George Jay Gould, president of the Missouri Pacific, and head 
of the Gould system ; Edward T. Jeffery, chairman of the board, 
and president of the Denver and Rio Grande and of the West- 
ern Pacific ; Frederic A. Delano, the new president of the Wabash ; 
Robert C. dowry, general manager of the Western Union 



724 WABASH 

Telegraph Company, a Gould property; Edgar T. Welles, vice- 
president; Wells H. Blodgett, third vice-president and general 
counsel ; Winslow S. Pierce, then president of the Western Mary- 
land, counsel and director for various Gould properties; Robert 
il* M. Gallaway, president of the Merchants' National Bank of New 

York, also a director in numerous other Gould properties as well 
as of the Southern Railway; Thomas H. Hubbard, president of 
the Guatemala Central Railroad, chairman of the board of the 
International Banking Corporation, also a director in the com- 
peting Toledo, St. Louis and Western ("Clover Leaf") ; J. J. 
Slocum, representing the Russell Sage Estate ; John T. Terry, 
vice-president of the Milwaukee Trust Company, also a director 
in the Iron Mountain, the Texas and Pacific and other Gould 
properties; William B. Sanders and S. C. Reynolds. 

It will be seen that the board was chiefly made up of the 
presidents of the Gould lines and Mr. Gould's close business 
associates. When Mr. Ramsay was ousted from the presidency 
in 1905 he attempted to contest the Gould supremacy of the road, 
but the result left no doubt as to the fact that the Gould interests 
have absolute control. 

Despite the fact that the stock has never paid a dividend 
and has very slight prospects, it is curious to find that the road 
reported in 1905 1,974 shareholders, and the controlled Wheeling 
and Lake Erie 1,004, a fact which illustrates the propensity of 
the public to buy most anything that is offered it. 

The Gould lines are distinctly not a part of the New York 
Central-Pennsylvania community of interest organization, and 
therefore meet with more direct competition than the other roads 
occupying the same territory. From this it results also that the 
Wabash has to depend very largely upon the Western Gould 
lines for its outside business ; but it is to be noted that since its 
victory, after a hot fight, for entrance into Pittsburgh, and the 
possession of the Western Maryland by the Gould interests, the 
Wabash is in a vastly different position than at any previous 
time in its history, though the results of these new combinations 
have hardly yet begun to tell. 

The removal of Mr. Ramsay from the presidency was the 
occasion of considerable changes. The Ramsay policy had been 
one of heavy expenditures for improvements and high mainte- 
nance charges, and the change from this policy is reflected in the 



WABASH 725 

heavy drop of these charges for 1906. Mr. Ramsay's successor 
was Frederic A. Delano, elected president in October, 1905. 

At the same time George Jay Gould, who had been chair- 
man of the board of directors, retired from that position, and 
was succeeded by Edward T. Jeffery, long associated with the 
Illinois Central and now president of the Denver and Rio Grande. 

Capitalization. 

In 1906-7 a scheme of recapitalization was carried out, 
whereby $30,000,000 par value of debenture bonds were ex- 
changed for $21,862,500 of new refunding 4% bonds and $31,620,- 
000 of new stock, divided equally between common and pre- 
ferred. The effect of this conversion, supposing it completed, 
was to add, net, $24,482,500 to the capitalization of the road and 
to add $874,500 to the fixed charges. This recapitalization plan is 
fully outlined under the heading of "Refunding Plan," later in 
this analysis. Were the capital account considered in relation 
to the income of the fiscal year of 1906, the result would have 
been as follows : 

(Capital Account under Recapitalization Scheme — Income of 1906.) 

Common stock — old $38,000,000 

—new 15,810,000 

Preferred stock — old 24,000,000 

—new 15,810,000 

Total $93,620,000 

Funded Debt— Bonds 66,788,000 

Notes 13,160,000 

Equipment 1,349,612 

New refunding 21,862,500 

Total capital $196,780,112 

Rentals capitalized at 4% 18,415,750 

Approximate gross capitalization $215,195,862 

Securities held 22,856,093 

Approximate net capitalization $192,339,769 

Approximate net capital per mile $76,416 

Average miles operated 2,517 

Net earnings on net capital 3.6% 

Stock on net capitalization 48% 

Fixed charges on total net income 80% 

Factor of safety 20% 

Actually at the close of the fiscal year of 1906, as of June 
30th, the capital account, considered in relation to the income 
for the year, appeared as below. In this analysis the two series of 
debenture bonds have been included under stock, since these bonds 



726 WABASH 

had voting rights in proportion of one vote for each $100 nomi- 
nal value, and the interest payments thereon optional. 

(Actual Capital Account as of June 30th, 1906. ) 

Common stock $38,000,000 

Preferred stock 24,000,000 

Debenture Bonds, Series A 3,500,000 

Debenture Bonds, Series B 26,500,000 

Total stock and debentures $92,000,000 

Funded Debt 66,788,000 

Equipment Trusts 1,349,612 

Notes '. 13,160,000 

Total capital $173,297,612 

Rentals capitalized at 4% 18,415,750 

Approximate gross capital $191,713,362 

Securities, etc 22,856,093 

Approximate net capital $168,857,269 

Approximate net capital per mile $69,150 

Average miles operated, 2,517 

Net earnings on net capitalization 3.9% 

Stock on net capitalization 52% 

Fixed charges on total net income 71% 

Factor of Safety 29% 

The rentals capitalized are the net rentals after deducting 
rentals received. In addition to the fixed rentals paid by the 
Wabash for the Grand Trunk line to Buffalo, it pays its propor- 
tion of the maintenance charges of the line. It will be seen that 
in the above estimate the estimated net capitalization amounts 
to $69,150 per mile, which on a road of the traffic of the Wabash 
is certainly high. It is nearly as high as that of the Lake Shore, 
$78,987, with a magnificent property and earnings of $25,000 per 
mile, and stands against an also similar estimate of $32,058 per 
mile for the Michigan Central, another superbly-built property. 

The fact of high capitalization is further reflected in the 
percentage which the net earnings show on the net capitaliza- 
tion, the figure for the Wabash amounting to only 3.9%, as 
against about 10% for the Michigan Central and 12.7% for 
the Lake Shore. The road belongs more in the category of the 
Nickel Plate, which is capitalized at $94,449 per mile, but whose 
net earnings still showed, in 1906, 6.0% on its capitalization. 

However, counting as stock the debenture bonds which only- 
pay interest in case it is "earned" — a matter more or less at the 
discretion of the bookkeeping department — the total stock 
makes up a full half of this capitalization, and upon this entire 



WABASH 727 

amount of stock, including the debentures, nothing whatever was 
paid in 1905 or 1906. 

The real weakness of the company lies in the fact that Fixed 
Charges, excluding any interest on debentures, consumed in 
1906, after heavily reduced maintenance charges, over 70% of 
the total net income, leaving a factor of safety for the underlying 
securities of less than 30%. The earnings, however, of a road 
with the east and west connections of the Wabash should be so 
stable that there is less danger in this low percentage than 
would be true of a road differently situated, and it is likely that 
this margin of safety will progressively increase, especially if the 
hopes centered on the Wabash Terminal properties are realized. 

Equities Owned. 

Of the $17,000,000 book value of Wabash securities owned, 
the chief item is the $10,000,000 of stock (all) of the Wabash- 
Pittsburgh Terminal Railroad, which was exchanged at par for 
$10,000,000 of Wabash common stock. As already noted, the 
treasury of the Terminal Company holds a controlling interest 
in the Wheeling and Lake Erie, consisting of $11,870,000, par 
value of the common, $847,500 of the first preferred and $6,423,- 
800 of the second preferred. On none of this stock is any divi- 
dend being paid, and, although the earnings of this property 
have been rapidly expanding, the prospects of dividends were 
not large, since in 1905 the road earned a deficit and in 1906 but 
a small surplus. 

In addition to this stock, but not included in the list of securi- 
ties held, the Wabash had in 1906 a loan to the Terminal Com- 
pany of $5,000,000. 

The Wabash owns also one-fifth, or $1,000,000, par value, of 
Chicago and Western Indiana Railroad, over whose tracks it 
secures entrance into Chicago. 

At the present time it cannot be said that the W r abash has 
any extensive equities beyond what were represented in its 
Other Income of $1,020,000, in 1906. The bonded debt of the 
Wabash-Pittsburgh Terminal Co. is very high, and the earnings 
on this road must be large in order to pay the Fixed Charges. 
In the course of time, however, the Wabash interest in this 
road might become valuable. 



728 WABASH 

Increase of Capitalization. 

The increase of capitalization since 1900 has been as follows 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 

Debt 

(Inc. Deb's.) 


Total 
Capital 


Gross 
Earnings 


1899-0. . . 
1905-6. . . 


$28,000,000 
38,000,000 


$24,000,000 
24,000,000 


$83,045,000 
109,948,000 


$135,045,000 
171,948,000 


$16,440,990 
25,015,378 



Increase over six years: Total capital, 26%; gross earnings, 51%. 
The increase in common stock was in exchange for Wabash- 
Pittsburgh Terminal stock, as already explained. Terminal 
bonds to the extent of $10,000,000 were issued in 1904 to secure 
additional terminals at St. Louis, Kansas City and other points. 
There were also issued $13,160,000 of notes, included in the 
above, for terminals at Pittsburgh. The entire stock and $6,6C0,- 
000 of first mortgage Wabash-Pittsburgh Terminal bonds and 
other collateral were pledged to secure these. 

Character of Traffic. 

Like the other Gould lines, the Wabash does not itemize its 
tonnage, but a very considerable part of its traffic is coal derived 
from the lines of the Wheeling and Lake Erie. The percentage 
of freight earnings to gross have increased very considerably, 
but passenger earnings are high, amounting to above 25% of the 
gross in 1906. 

Surplus Earnings. 

The Wabash earnings per mile reached a high point in 1892, 
when on 1,916 miles of road they amounted to $7,506 per mile. 
On about the same mileage they declined to $5,953 per mile in 
1897. From this point they have risen steadily, reaching nearly 
$10,000 per mile in 1906. The items for eleven years are as fol- 
lows: 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1895-6 


1,936 
1,936 
2,061 
2,278 
2,340 
2,360 
2,438 
2,483 
2,517 
2,517 
2,517 


$12,807,143 
11,526,787 
13,207,862 
14,393,974 
16,440,990 
17,554,465 
19,053,493 
21,140,831 
23,023,677 
24,696,600 
25,015,378 


$6,615 


1896-7 


5,953 


1897-8 


6,408 


1898-9 


6,318 


1899-0 


7,626 


1900-1 


7,438 


1901-2 


7,815 


1902-3 


8,513 


1903-4 


9,148 


1904-5 


9,811 


1905-6 


9,937 



WABASH 729 

These increased earnings have been in the face of a steadily 
decreasing freight rate. Going back a little, the Wabash re- 
ceived in 1882 an average of .93c. per ton per mile, this average 
rate declining to .70c. in 1882, and to .55c. in 1899. For the most 
of roads this was a bedrock year, and other lines in the same 
territory, the Pennsylvania and New York Central lines notably, 
have since shown a considerable increase from this point. So did 
the Wabash for a time, the figure reaching .64c. in the St. 
Louis fair year of 1904, but in 1906 the rate was .54c. This was a 
lower average rate than in the low year of 1899. Speaking of the 
rate in 1906 the general traffic manager said : "These figures 
taken by themselves are discouraging, but are due to an increase 
in average haul rather than to a general decrease in rates," the 
average haul having increased about 10% in 1906 over 1905. 
President Delano remarked further: "The management is not 
apprehensive of a serious reduction of the present scale of rates, 
which in our territory is very low." 

The net earnings per ton per mile in 1905 amounted to 
only .44 cents, owing to very heavy maintenance charges. In 
1906, through a drastic cut in the maintenance appropriations, 
the new management showed net freight earnings of 1.5 cents 
per ton per mile, a fact which is reflected in the increased sur- 
plus for the year. 

Maintenance. 

For some years under the Ramsay management considerable 
sums for improvements were charged to earnings, the total ap- 
propriations rising to $3,409 per mile in 1905. In 1906, under the 
new management, charges for both way and equipment were 
very considerably reduced, the reduction amounting to $357 per 
mile on maintenance of way and $355 per mile for maintenance 
of equipment. The two together amounted to a difference of 
$712 per mile, which on the 2,517 miles of road operated made 
a difference of $1,764,000 in the operating expenses of the year. 
It was mainly by this means that a considerable surplus was 
shown in 1906, as against a deficit in 1905. The items for six 
years stand as follows : 



730 



WABASH 



Year 


Traffic Density 


Maintenance per Mile 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


838,539 
798,775 
885,603 
864,394 
929,547 
963,318 


$1,044 
1,196 
1,490 
1,463 
1,592 
1,235 


$1,066 
1,025 
1,258 
1,380 
1,817 
1,462 


$2,110 
2,221 
2,748 
2,843 
3,409 
2,697 


Average. . . . 


880,032 


$1,332 


$1,370 


$2,702 


Nickel Plate . . 
C. C. C. &St. L 

T. St. L. & W. 
Alton 


2,528,054 
1,105,215 
959,668 
1,046,149 
1,099,515 


2,042 
1,443 
1,254 
996 
1,371 


1,966 
1,614 
1,630 
959 
1,273 


4,008 
3,057 
2,884 
1,955 
2,644 











It will be seen that the Wabash's charges, traffic density 
compared, have been fully up to the standard of other lines in 
the same territory — the Big Four, a Vanderbilt line, the Van- 
dalia, a Pennsylvania line, and the Alton, then a Harriman line. 

But this was with the heavy charges under the Ramsay 
management. The total appropriations for 1906 were just about 
up to the average appropriations for the six years, with no great 
increase in traffic density; and if these may be accounted some- 
where near the normal maintenance, the road is in a better posi- 
tion now than ever before in its history. 

In addition to the amounts devoted to maintenance the road 
has for a series of years practically turned back all its surplus 
into improvements, and while the amounts so appropriated have 
not been large for a road doing a gross business of $25,000,000 
a year, they have been steadily increasing to a point where the 
appropriations for 1906 amounted to more than 25% of the 
regular appropriations for maintenance. The items since 1900 
stand as follows : 



1899-00 $223,664 

1900-1 544,126 

1901-2 583,500 

1902-3 r 653,132 

1903-4 915,107 

1904-5 1,167,869 

1905-6 1,758,626 

Total $5,846,024 



WABASH 



731 



Surplus Earnings. 

The nominal surplus, under the conditions described above, 
have through a series of years stood as follows : 



Year 



1900-1 

1901-2 

1902-3 

1903-4 

1904-5 Deficit 

1905-6 



Surplus 



$847,262 

994,960 

1,059,283 

1,034,398 

291,503 

2,267,963 



Per cent. 
Earned on 
"B" Deb. 



2.5 
3.0 
3.3 
3.2 

7.1 



Average 

Price. 
"B" Deb. 



55 

78 
68 
63 
75 
79 



These items are not the nominal surplus shown by the 
reports of the company, but represent the amount of surplus before 
the improvement appropriations have been made. Thus, in 1905, 
the nominal deficit shown by the road was $1,459,372, and in 1906 
the nominal surplus amounted to $509,332. The amount shown 
in the reports, added to the appropriations for improvements, 
constitute the surplus shown in the above table. 

Debenture Interest Payments. 

From 1900 to the beginning of 1904 the full 6% was paid 
upon the three and a half million dollars of debenture bonds, 
series "A," this interest charge amounting to $210,000 per year. 
No payments were made in the years of 1905 and 1906, and no 
interest has ever been paid upon the $26,500,000 of debenture 
bonds, series "B." The full 6% dividend on both series of deben- 
tures would call for $1,800,000, and it is apparent that had no 
appropriations been made for improvements in 1906, the full 
interest on these debentures was nominally earned. In March, 
1905, a committee with Henry Evans, president of the Continen- 
tal Fire Insurance Company, was formed to request the deposit 
of "B" debentures with a view to obtaining an adjustment of 
interest on these securities. 

The Balance Sheet. 

The balance sheet of June 30th, 1906, showed : 

Current assets $4,877,027 

Current liabilities 5,671,312 

Leaving a debit balance of $794,285 



732 WABASH 

The debit balance to Profit and Loss in 1905 of $515,419 was 
turned into a credit balance in 1906 of $248,200. 

In addition to the items above included, there were loans 
receivable of $5,000,000, the amount loaned by the Wabash to 
the Wabash-Pittsburgh Terminal. 

It is obvious that the road at the close of the year was in 
need of working capital. 

Refunding Plan. 

In 1906 a comprehensive scheme was adopted for the retire- 
ment of tHe $30,000,000 of debenture bonds, the refunding of 
existing bonds, notes, &c. } and to provide the company with 
needed new capital. A new issue of 4% 50-year refunding mort- 
gage bonds was authorized, to the amount of $200,000,000, bear- 
ing date of July 1st, 1906, and secured on all the property of the 
company at that date owned, or subsequently acquired from the 
proceeds of the sale of these bonds. 

Of the new bonds $21,862,500 were set aside in exchange for 
the debenture bonds under the following terms : 



New 


Preferred 


Common 


Bonds. 


Stock. 


Stock. 


$795 


$580 


$580 


720 


520 


520 



For each $1,000 Series A.. 
For each $1,000 Series B.. 

To further provide for the exchange of the debentures 
under the above offer an increase was authorized in the pre- 
ferred stock from $24,000,000 to $40,500,000 and in the common 
stock from $78,000,000 to $159,500,000, or a total of $200,000,- 
000 in all. 

In January of 1907 more than 80% of the outstanding deben- 
ture bonds having been deposited, the plan was declared opera- 
tive. The effect of this recapitalization scheme, supposing the 
conversion of the debentures complete, was, as already noted, to 
add $21,862,500 to the bonded indebtedness and $15,810,000 to 
the preferred and an equal amount to the outstanding common 
stock, or a net capital increase of $24,202,000. 

This meant an addition of $874,500 to the interest charges, 
and, as shown in the capital analysis in the foregoing pages, 
would have increased the percentage of total net income con- 
sumed by fixed charges from 69% to 80%. Even under the 
increased earnings of 1907 the percentage of fixed charges was 



WABASH 733 

still very high, so that the $30,000,000 of new stock given as a 
bonus to the holders of the debentures was of only prospective 
value and had very little market worth. 

Investment Value. 1 1' 

The interest-bearing debt of the Wabash, $32,300 per mile in 
1906, was, on a road with gross earnings of nearly $10,000 per 
mile, not excessive, and yet interest charges with taxes, &c, 
were sufficient to consume during the year 69% of the total net 
income. The balance remaining would have been sufficient to 
pay the full 6% on the outstanding debenture bonds, but it 
would have left less than 2% available for the amount of pre- 
ferred stock then outstanding, $24,000,000, and nothing at all for 
the $38,000,000 of common stock. 

As a matter of fact, as already noted, nothing was paid on 
either series of the debentures in either 1905 or 1906 and no 
interest whatever had ever been paid on the $26,500,000 of series 
B. Instead of these payments, $1,758,628 was turned back into 
the improvements of the road and the larger part of the balance 
was consumed by sinking fund payments, etc. 

The issue of $21,862,500 of new bonds under the refunding 
plan brought the interest-bearing debt up to over $103,000,000, 
or more than $40,000 per mile, and the interest charge on this 
increase would have left a surplus on the income of 1906 of only 
about $1,150,000. Ignoring the fact that the Wabash was greatly 
in need of new equipment and betterments in order to provide 
for its increased business, this would have been equivalent to 
less than 3% on the amount of preferred stock as increased under 
the recapitalization scheme — $39,810,000. This was after a very 
considerable reduction in maintenance charges from the year pre- 
ceding, and it is evident enough from this that no dividends on 
the preferred were in sight. 

The addition to the interest-bearing debt brought no new 
capital to the road and simply exchanged a fixed charge of 
$874,500 for the debenture bonds upon which payment of interest 
was optional. The report for 1906 states : "Competing lines, 
great systems to the north and south of your property, have 
had the benefit of large and continued capital expenditures, 
while the Wabash Company, with its debenture mortgage as 
an obstruction to every important source of new capital, has 



734 WABASH 

been seriously handicapped in this respect, restricted as it has 
been to its surplus earnings as its almost exclusive capital fund, 
and with this fund limited in this application by the provisions of 
the mortgage." 

The report adds : "Our earnings now, some $10,000 per mile, 
ought with an intelligent expansion of our facilities, to be readily 
increased to even double that figure/' 

From this it will be seen that the Wabash is another exam- 
ple of the fact that over-capitalization is powerless to compel 
higher rates or increase earnings, and that, while this watered 
capital may be of some use for stock jobbing purposes, it puts 
an almost insurmountable obstacle in the way of the improve- 
ment of the property and the ability of a company to cope with 
its opportunities. 

The preferred stock is entitled to 7% non-cumulative divi- 
dends. This stock sold as high as $54 per share in 1902, declin- 
ing to $27 per share in 1903 and rising to $53 per share in 1906. 
It declined again to $22 per share in March of 1907. 

Although the dividend to which this stock is limited is high, 
7%, the prospect of any considerable dividend seemed as re- 
mote in 1907 as at any time during the preceding six years. As 
a purely speculative possibility, the stock is scarcely entitled to 
sell higher than many common stocks of similarly over-capital- 
ized roads, and is scarcely to be regarded as an attractive, solid 
investment. It is evident, however, that its fluctuations in price 
are wide and that, barring a serious set-back in business, it might, 
if purchased somewhere around the low level of 1907, show in 
time a considerable profit to the speculative holder. 

From the foregoing it is evident that the common stock, 
increased under the refunding plan to $53,810,000, is of no value 
whatever save for voting and for stock market purposes. It sold 
as low as $6^ per share in 1900, rising to $38 per share in 1902. 
The highest price of 1906 was $26 per share, and it declined in 
March of 1907 to $12^ per share. It is a curious fact that such 
stocks always seem to find some market at from $5 to $10 per 
share under almost any conditions short of a receivership. Pur- 
chased at such low figures, they often yield a large profit to 
the holder, but it is purely a hazard and dependent on the 
continuance of general conditions sufficient to offer some show 
of prospective value and the continued solvency of the company. 

The famous contract made by Andrew Carnegie for his steel 



WABASH 735 

company with the Wabash Railroad some five years previous, 
whereby the Gould lines secured 25% of the tonnage of the 
Carnegie mills, did not become operative until the close of the 
fiscal year of 1906. It is estimated that in and out-bound ton- 
nage of the Homestead, Duquesne and Edgar Thomson mills 
is 16,000,000 tons, of which 25% would represent 4,000,000 tons. 
This latter amount would be equivalent to about 33% of the 
total tonnage for 1906. Were the Wabash Company able to 
handle this amount of business profitably, it is obvious that it 
would add very largely to the freight profits of the road. But it 
is to be noted that the average freight rate of the Wabash has 
latterly shown a tendency to decline, decreasing from .64c. in 
1904 to .54c. in 1906. The report for 1906 states that the "lines 
of the Wabash traverse a zone of dense traffic handled on a 
basis of rates normally so low as absolutely to require ample 
and perfect facilities for economical operation, if operation is to 
be, and to continue to be, profitable." It is evident that the Wabash 
could not handle a considerable increase of traffic without pro- 
portionate capital expenditures. 



WEST JERSEY AND SEASHORE RAILROAD. 

The Philadelphia, Atlantic City and southern New Jersey lines 
of the Pennsylvania are operated under the name of the West Jersey 
and Seashore Railroad, with a total operated mileage of 368 miles. 
On January 1st, 1907, the Pennsylvania owned $4,096,900 common 
and $3,400 of the special guaranteed, out of a total of $9,679,450 
outstanding capital stock. A majority of the board of directors are 
Pennsylvania men. Outside of these the direcorate of 1906 included 
Benjamin F. Lee, Trenton, N. J. ; Josiah Wistar, of Woodbury, N. 
J. ; William G. Nixon, of Bridgeton, N. J. ; Israel G. Adams, of 
Atlantic City. N. J. ; George S. Bacon, Millville, N. J., and Robert 
W. Downing, of Philadelphia. All the officers are Pennsylvania 
men. 

Mileage operated increased from 310 in 1896 to 368 in 1906; 
gross earnings from $2,554,920 to $5,206,283 ; the surplus earnings 
from $263,224 to $797,648. For 1906 the road showed total net 
earnings of $1,276,076 and Fixed Charges were $478,428 or 40%. 
From the surplus earned, a dividend of 6% was paid on the common 
together with 6% on the $37,850, of special guaranteed stock and 
$274,728 was carried to credit of Profit and Loss. 

The entire surplus earnings of 1901-2-3 were devoted to 
extraordinary expenditures; in 1904, $331,254; in 1905, $552,000. 
Five per cent, was paid on the common stock for a series of years. 
In 1906 this was increased to 6%. 

Maintenance charges have not been heavy in themselves, but 
with a round half million dollars per year added for special improve- 
ments, this should be amply sufficient to keep the property in good 
condition. The dividend of 6% therefore seems a solid one, and on 
a 4% money basis, the stock should sell in the neighborhood of $75 
per $50 share. The shares (par value $50) sold down to $55 in 
1904 and rose to $72 in the first half of 1906, declining to $59 in 
December. 

The road is capitalized for about $37,000 per mile, with gross 
earnings of $14,555 per mile; and should the latter increase in the 

(736) 



WEST JERSEY & SEASHORE 737 

same steady fashion as they have in the past ten years, the stock 
of the road should rule higher than the quotations noted. Below 
$70 per share, and with 4% money, the stock should represent a 
solid investment. But it should be recalled that the larger part of 
its earnings are from passenger traffic, largely seaside travel, and 
that in a bad year, this might be expected to fall off rather heavily. 



47 



WESTERN MARYLAND RAILROAD. 

The Western Maryland Railroad is intended as the eastern out- 
let of the Gould transcontinental line, which, when the present gap 
between the Western Maryland and the Wabash-Pittsburgh Termi- 
nal is filled in, and the Western Pacific completed, will stretch from 
the Atlantic to the Pacific and will form the only line under a single 
management from coast to coast, in the United States. 

The Western Maryland was chartered in 1852 and the opera- 
tions of the company during the first 50 years of its corporate 
existence were restricted to a local territory in Maryland and South- 
eastern Pennsylvania. It was controlled by the city of Baltimore 
and operated about 253 miles of road, running parallel to the Balti- 
more & Ohio. In 1902 the Gould interests acquired the interest of 
the city of Baltimore in the road and likewise the West Virginia 
Central & Pittsburgh Railway. The gap between these two roads 
was bridged by the construction of a line 54 miles long from Cum- 
berland, Maryland, to Cherry Run, West Virginia, and tidewater 
terminals at Baltimore were acquired and constructed. 

In 1905 the Western Maryland Tidewater, the Potomac Valley, 
Piedmont & Cumberland, the West Virginia Central & Pittsburgh, 
the Bellington & Beaver Creek and the Coal and Iron railways were 
merged in the larger company, and in January, 1907, the same 
interests obtained control of the Uniontown & Wheeling Shortline. 
The company /has now a through line from the coal fields of West 
Virginia to Baltimore and in 1906 operated a total of 544 miles. An 
extensive scheme of betterments and double tracking is being car- 
ried out to fit the road to handle a daily increasing business. 

The company owns the Davis Coal & Coke Company, control- 
ling 110,000 acres of coal lands and to this has been added the Mary- 
land Smokeless Coal Company with 25,000 acres of Pittsburgh gas 
coal, so that the present holdings of the company are, therefore, 
about 135,000 acres of coal lands with 23 mining plants and 823 
coke ovens. 

(738) 



WESTERN MARYLAND 739 

The direcorate is made up in the Gould interest and with the 
completion of the connecting line with the Wabash and the 
Wheeling & Lake Erie the property will be operated as a part of 
the eastern Gould system. 

Capitalization. 

As of June 30th, 1906, the capital account stood as follows : 

Common stock $15,685,400 

Funded Debt 55,776,875 

Construction Loans 3,000,000 

Coal Purchase Notes 2,078,729 

Total capital $76,541,004 

Rentals capitalized at 4% 4,288,345 

Approximate gross capitalization $80,829,349 

Securities held 10,670,835 

Approximate net capitalization $70,158,514 

Approximate net capital, per mile $138,379 

Average miles operated 507 

Net earnings on net capitalization 2.5% 

Stock on net capitalization 22% 

Fixed charges on total net income 90% 

Factor of Safety 10% 

It will be seen from the above that the interest bearing debt is 
very large, the amount of stock small, and the estimated net capitali- 
zation was $138,379 on a road with gross earnings of less than $10,- 
000 per mile. Net earnings on this estimate of net capitalization 
amounted to only 2.5% and even if the small amount of stock were 
eliminated, the figure would still be very low. The company is 
handicapped, therefore, by a very heavy burden of debt. 

In 1906 fixed charges consumed 90% of the total net income. 

Stability of Earnings. 

The consolidated earnings on the lines now embraced in the 
Western Maryland have been, in the four full years since the Gould 
interest obtained control, as follows: 



740 WESTERN MARYLAND 

1902-3 $3,712,833 

1903-4 3,633,097 

1904-5 3,900,249 

1905-6 4,802,094 

Nearly half of the tonnage of the road in 1906 was bituminous 
coal, and mise products amounted altogether to 65%. Lumber, &c, 
made up 15% more and the balance was distributed over a variety 
of traffic. 

The rate per ton mile was comparatively high, .73c, and the 
average freight earnings per train mile amounted to $2.58. 

Maintenance. 

Maintenance charges and traffic density for 1905 and 1906 
compare as follows : 

Maintenance 
Traffic Density. Way. Equipment. Total. 

1904-5 751,952 1,003 933 1,936 

1905-6 977,114 981 1,174 2,155 



! 



It will be seen that these maintenance charges were not high. 
For example on a traffic of 1,179,659 ton miles, the Wabash spent 
in 19Qj5, $1,235 per mile for way and $1,462 per mile for equipment, 
or a total of $2,697 per mile, the average mileage earnings being 
nearly the same; yet these maintenance charges were a very con- 
siderable reduction from the year preceding. It is obvious that 
while the Western Maryland's maintenance charges might have 
been adequate they concealed no surplus earnings. 

Surplus. 

The consolidated income account for the four full years since 

the Gould interests have been in control has shown a surplus as 

follows : 

1903 $1,215,382 

1904 400,442 

1905 206,097 

1906 251,508 

The main reason for this diminishing surplus has been the 
diminished earnings from coal operations. In this regard, the 
Western Maryland has met with the same experience as the Dela- 
ware & Hudson and some other coal lines, in that its coal operations 
have shown a very heavy decrease. The net profits reported for 
the corresponding four years as follows : 



WESTERN MARYLAND 741 

1903 $1,127,746 

1904 511,723 

1905 428,311 

1906 720,043 

In 1907 there was a very material gain in total net income, 
but this was offset by an increase of nearly $600,000 in interest 
charges. In very large part these increased charges were for 
betterments from which the road did not derive the full benefit in 
1906. 

The Balance Sheet. 

As of June 30th, 1906, there were current assets, excluding 

materials and supplies on hand of $1,781,202 

Current Liabilities of 2,105,954 

Leaving a debit balance of $324,752 

The item of cash was $317,429 and the balance to credit of 
profit and loss was $2,039,463. 

Investment Value. 

The acquisition of the Western Maryland by the Gould interest 
was intimately associated with the entry of the Wabash into Pitts- 
burgh. It is obvious that when the connecting link with the 
Pittsburgh Terminal or the Wheeling & Lake Erie is completed, the 
road should derive a heavily increased traffic. The value of the 
Western Maryland securities, therefore, is largely a speculation as 
to what the profits from this connection will be. 

The amount of stock outstanding is small compared with the 
bonded debt, but the surplus earnings of 1906 were equivalent to 
less than 2% on the amount outstanding. 

The stock was quoted as high as $44 per share in June of 1906, 
declining in the general slump to $15 in April of 1907. It is 
scarcely probable that the connection with the Wabash-Pittsburgh 
Terminal will be completed before perhaps 1909, and in the mean- 
time the road will be put to large capital expenditures, charges on 
which will scarcely increase the present proportion of surplus to 
earnings. The stock would therefore be an exceedingly long 
pull investment; and it is to be remembered that even when the 
transcontinental line be completed, the actual earnings of the road 
will still be largely dependent upon the conditions of the coal and 
iron industry. 



WESTERN PACIFIC RAILWAY. 

The Western Pacific has under construction a line from Salt 
Lake City to Oakland, across the Bay from San Francisco, a 
distance of 930 miles. It has purchased the Alameda and San 
Joaquin R. R., from Stockton to Tesla, California, 30 miles, and 
the control of the Boca and Loyalton, from Boca to Beckwith, 56 
miles. 

The line, when completed, will form the western end of a 
Gould transcontinental line. 

The president of the company is E. T. JefTery, president of 
the Denver and Rio Grande R. R., and the line is being financed 
through the latter road. A statement of the conditions which 
led to the construction of the road was given in the report of the 
Denver and Rio Grande for 1905, and is here reproduced in ex- 
tenso. 

"For many years, while the line of railway between Ogden 
and San Francisco was uncontrolled by interests competitive 
with your System, your Company enjoyed a satisfactory share 
of the traffic to and from California, and one of the reasons 
moving the management, between four and five years ago, to 
acquire the Rio Grande Western, was the closer relationship that 
would be established with the San Francisco line of the Southern 
Pacific Company and the freer interchange that it seemed prob- 
able would result therefrom. Subsequent events were in a 
measure disappointing. The control of Southern Pacific by 
Union Pacific interests has led to unexpected restrictions on 
interchange, and, more especially, unlooked for impediments in 
the way of securing traffic in territory reached by the Southern 
Pacific Line. 

"These considerations, in connection with the rapid develop- 
ment of the commercial, agricultural and industrial interests on 
the Pacific coast, and the increase of commerce with the Philip- 
pines, China and Japan, led the management, reluctantly, to 
investigate the feasibility of an independent line, in your interest, 
from either Salt Lake City or Ogden, to San Francisco, with 

(74 2) 



WESTERN PACIFIC 743 

such branches and laterals as might from time to time be desir- 
able for the development of natural resources within reasonable 
distance of the main stem. 

"With this end in view, and with a manifest obligation be- 
fore it to advance your interests, the management assisted in 
promoting the plans of the Western Pacific Railway Company, 
a corporation organized under the laws of the State of California 
for the purpose of building a main line of railway from San 
Francisco to Salt Lake City, with certain proposed branches, or 
laterals. Coincident with this, careful investigations and pre- 
liminary surveys were made, under the auspices of your Com- 
pany, some of them by its Chief Engineer, Mr. E. J. Yard, and 
his assistants, for the purpose of determining the best available 
route. These were supplemented by the professional services of 
Mr. Virgil G. Bogue, an engineer of experience, acting under 
the general direction of your Company. These engineering 
efforts were successful beyond expectation, and a main line has 
been definitely located, which, through the Sierra Nevada range 
of mountains, has a maximum gradient of one per cent. (52.8 
feet to the mile) in each direction, and lighter grades on both 
sides of the range, with satisfactory alignment throughout, and 
which, in general desirability and advantages, affords a route 
superior to any existing line to the California Coast. 

"The management of the Western Pacific Railway Company 
co-operated and placed all their plans, surveys and information 
at the disposal of your officers, and, after protracted negotiations, 
the control of their corporation was transferred to your Com- 
pany with all rights, franchises and property interests, including 
about thirty-eight miles of railway in operation. 

"As planned, the main line between San Francisco and Salt 
Lake City will be substantially constructed, according to modern 
specifications, and will be laid with steel rails of a weight of 85 
lbs. per yard. It will connect at Salt Lake City with your Rio 
Grande Western Railway and will use, jointly, the yards, station 
facilities, repair shops, etc., at that point, paying a reasonable 
rental therefor. 

"The Western Pacific Railway Company has at present an 
authorized capital of $50,000,000.00, which will be immediately 
increased to $75,000,000. The financial arrangements for 
the construction of the railway were completed in the last three 
months of the past fiscal year by the issue and sale to responsible 



744 WESTERN PACIFIC 

bankers of $50,000,000 of First Mortgage Five Per Cent. 
Thirty- Year Gold Bonds of that Company. It is estimated 
that the proceeds of this issue will cover the cost of the main 
line, with terminals and necessary equipment. By request of 
the Bankers and with the approval of your Directors, the Presi- 
dent of your Company has been elected President of the West- 
ern Pacific Company. 

"The interest accruing upon the Western Pacific Railway 
Company's First Mortgage Bonds during the period of con- 
struction, to September 1st, 1908, has been provided for and 
will be included as a part of the cost of construction. 

"As a part of the plan for financing the Western Pacific 
Railway, contracts, pledged by assignment to Bowling Green 
Trust Company, Trustee of the Mortgage, securing the bonds, 
and for the benefit of the holders thereof, were, on the part of 
The Denver & Rio Grande Railroad Company and The Rio 
Grande Western Railway Company, under appropriate corporate 
action, entered into with the Western Pacific Railway Com- 
pany, the principal features of which are: 

"First. In the event that the proceeds of the First Mort- 
gage Bonds of the Western Pacific Railway Company shall 
prove insufficient to complete the main line of railway from San 
Francisco to Salt Lake City, with adequate terminals and ter- 
minal facilities, and equipment to the amount of $3,000,000, 
the Rio Grande Western Railway Company undertakes to pro- 
vide sufficient funds to assure the completion, and if called upon 
to make any advances, it is to take Second Mortgage Bonds of 
the Western Pacific Railway Company, bearing interest at five 
per cent, per annum. 

"Second. The Denver & Rio Grande Railroad Company and 
The Rio Grande Western Railway Company, jointly, undertake 
to semi-annually make up any deficit in the earnings and income 
of the Western Pacific Railway Company m the amount required 
to meet its operating and maintenance expenses and taxes, and, 
after completion of the main line, the interest upon its First 
Mortgage Bonds, and, after August 1, 1911, certain installments 
due upon its Sinking Fund. For all advances so made they are 
to receive the promissory notes of the Western Pacific Railway 
Company, payable out of its first available income. These 
advances on the part of The Denver & Rio Grande Railroad 
Company and The Rio Grande Western Railway Company will 



WESTERN PACIFIC 745 

be made only in the event and to the extent that the application 
of the proper available income of the Western Pacific Railway 
Company is insufficient to meet the above-mentioned obligations, 
which contingency is regarded as remote. 

"Third. Under the contracts with the Western Pacific 
Railway Company, The Denver & Rio Grande Railroad Com- 
pany has now received 100,000 shares of the capital stock of 
the Western Pacific Railway Company, and upon the increase 
of the capital stock, as above mentioned, will receive an addi- 
tional 100,000 shares thereof. In like manner The Rio Grande 
Western Railway Company has received 150,000 shares, and 
will, upon such increase of the capital stock, receive an addi- 
tional 150,000 shares. 

"Upon the completion of the increase of capital stock, The 
Denver & Rio Grande Railroad Company and The Rio Grande 
Western Railway Company will, together, hold in their treas- 
uries, 500,000 shares, of a par value of $50,000,000.00, out of a 
total capitalization of the Western Pacific Railway Company 
of 750,000 shares, of a par value of $75,000,000.00. This will 
place your Company in the absolute control of the Western 
Pacific Railway Company, without any immediate money out- 
lay, and with only a contingent liability for the future. 

"You should be advised that the entire issue of First Mort- 
gage Bonds of the Western Pacific Railway Company may be 
called in, under the terms of the Mortgage, at any time prior to 
maturity, at 105% of face value with accrued interest. 

"In further support of the financing of the Western Pacific 
Railway Company, and for the purpose of assuring it a fair 
share of transcontinental traffic, one of the. contracts above men- 
tioned, between The Denver & Rio Grande Railroad Company 
and The Rio Grande Western Railway Company, of the one 
part, and the Western Pacific Railway Company, of the other 
part, also includes a traffic agreement. Provision is made for a 
joint through line of the Denver & Rio Grande, Rio Grande 
Western and Western Pacific Railways. This arrangement is 
not only of great advantage to each of the companies participat- 
ing in such joint through line, but it also assures the Western 
Pacific Railway Company a lucrative business and good earn- 
ings so soon as its main line is put in operation. 

"The construction of the Western Pacific Railway Company's 



746 WESTERN PACIFIC 

line is now a certainty, and its completion within the next three 
years is confidently anticipated. 

"The Pacific Coast traffic is already very large and is rapidly 
growing. In view of the greatly increased volume of this traffic 
that will be carried over your existing lines so soon as the new 
railway is completed, and in view also of the advantages to be 
derived from the development of local industries and the open- 
ing up of additional markets, the importance and value of this 
new artery of commerce to your System of railway and to your 
Utah Fuel Company can hardly be overestimated. 

"Your Board of Directors have great confidence in the ad- 
vantages which this transaction will bring to your property, and 
this confidence is the result of the most careful investigation 
and consideration, extending over several years, and is based 
upon the commercial growth of the country, and especially upon 
the marvelous richness and development of the great Pacific 
Coast territory and of the foreign trade tributary thereto. 

(Signed.) E. T. JEFFERY. 

New York City, August 27th, 1905." 
In the report for 1906 President Jeffery states : 
"Active work has been under way during the greater portion 
of the fiscal year, but the scarcity of labor throughout the 
country has retarded the work, and the amount accomplished 
thus far is less than was anticipated. Every effort to secure 
adequate forces is being made by the contractors who have 
undertaken the heaviest and most difficult parts of the enter- 
prise. It is thought that later on full forces will be secured. 
The financial details, unfinished a year ago, were satisfactorily 
concluded by increasing from $50,000,000 to $75,000,000 the 
capital stock of the Western Pacific Company, and, pursuant to 
the contracts mentioned in the last report, by placing an addi- 
tional 100,000 shares, or $10,000,000, in the Denver & Rio Grande 
Company's treasury, and 150,000 shares, or $15,000,000, in the 
treasury of the Rio Grande Western Company, thus giving these 
two Companies 500,000 shares of a par value of $50,000,000, or 
two-thirds of the entire capital stock. 

"It may not be out of place to say that recent events in San 
Francisco have in nowise disturbed the confidence your directors 
have expressed in this new line of railway and in the advantages 
to be derived from the development of its local resources, and 
the importance and value of this new artery of commerce to the 



WESTERN PACIFIC 747 

Denver and Rio Grande System. Faith in the future of the 
Western Pacific Railway is just as strong as it was before the 
San Francisco disaster. The city will be rebuilt on finer, more 
attractive and better engineering plans. The great harbor will 
continue to hold and increase its ocean commerce ; the navigable 
waters of the Sacramento Valley will always attract and sustain 
inland navigation. San Francisco as a financial center will main- 
tain her supremacy on the Pacific Coast ; trade and commerce 
by land and water will pay tribute in greater volume than ever 
before to her merchants, manufacturers and citizens generally. 
The soil of California is as fertile as it was before the disaster, 
the mines are as productive, the forests are as rich in timber, 
and the other various natural resources are just as extensive and 
valuable." 



WHEELING AND LAKE ERIE. 

The Wheeling & Lake Erie is a subsidiary of the Wabash and 
forms a connecting link between that road and the Wabash-Pitts- 
burg Terminal, which carries the Gould lines into the Pennsylvania's 
stronghold. Eventually it will also be linked with the Western 
Maryland. In 1906 it operated 442 miles, extending from Wheeling, 
W. Va., to Toledo on Lake Erie, with branches to Cleveland and 
Zanesville. During the year it acquired the Lorain & West Virginia, 
under construction from Wellington north to Lorain, 30 miles, with 
branches five miles, and was building a cut-off known as the Sugar 
Creek & Northern, 22 miles. The company owns a majority of the 
stock of the Pittsburgh,. Wheeling & Lake Erie Coal Company. 

The Wheeling & Lake Erie connects with the Wabash-Pitts- 
burg Terminal Railroad near Jewett, Ohio, and a majority of the 
Wheeling & Lake Erie stock is owned by the latter company, namely : 
$11,870,000 par value of the common, $847,500 of the first preferred, 
and $6,423,800 of the second preferred, or $19,141,300 out of a 
total of $36,980,400 of the outstanding capital stock. All of the 
stock of the Wabash-Pittsburg Terminal Company in turn is- owned 
by the Wabash Railroad. 

Ex-Governor Myron T. Herrick of Cleveland, Ohio, was chair- 
man of the board in 1906 and F. A. Delano, President, the balance 
of the directorate being made up in the- Gould interest. 

In 1905 the road reported 1,004 shareholders. 

Capitalization. 

As of June 30th, 1906, the capitalization of the road stood as 
follows : 

Common stock $20,000,000 

1st preferred 4,986,900 

2nd preferred 11,993,500 

Total ; $36,980,400 

(748) 



WHEELING & LAKE ERIE 749 

Funded debt 15,000,000 

Notes 8,000,000 

Equipment notes 3,314,500 

Total capital $63,294,900 

Rentals capitalized at 4% 2,897,500 

Approximate gross capitalization $66,192,400 

Securities, etc 1,857,829 

Approximate net capitalization $64,334,571 

Approximate net capital, per mile $145,553 

Average miles operated 442 

Net earnings on net capital 2.4% 

Stock on net capitalization 57% 

Fixed charges on total net income ...... 90% 

Factor of Safety 10% 

It will be seen from the above that the road is fantastically 
over-capitalized and this applies not merely to the stock but also 
to the bonds. If all of the stock were wiped out the net earnings 
of 1906 would have shown only about 5% on the net bonded capitali- 
zation. It will be further seen that in 1906 fixed charges consumed 
nearly the entire amount of net income, while in 1905 the road 
showed a nominal deficit. This, in the face of. gross earnings of 
$12,000 per mile, and an operating ratio of no more than 70%, was 
not a good showing and indicated the heavy burden of the bonded 
debt. 

In 1905 the issue of $35,000,000 of 50-year 4% general mort- 
gage bonds was authorized to provide for the retirement of the 
existing underlying mortgage bonds and to make financial provision 
for the improvement and equipment of the company's property to 
meet the demands of a large prospective increase of business. In 
pursuance of the terms of this mortgage, $12,000,000 par value of 
these bonds were issued and delivered to the New York Trust Com- 
pany in part security of $8,000,000 of the company's 3-year 5% 
gold notes. These notes were sold at 95, realizing a sum of $7,600,- 
000, applied in the retirement of the unsecured floating debt, the 
purchase of equipment and an extensive scheme of grade-reduction 
and other betterments. 



750 WHEELING & LAKE ERIE 

Character and Stability of Traffic. 

The road is largely a coal line and the report contains a table 
showing that the total capacity of the coal mines tributary to the 
road amounts to 27,830 tons per day. The average freight rates 
are low, .48c. in 1906, .50c. in 1905, the average train load in 1906 
537 tons. Earnings have risen very rapidly since the reorganization 
of the road in 1899, as the following table reveals: 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1899-0 


393 
442 
442 
442 
442 
442 
442 


$2,670,025 
2,954,105 
3,537,023 
4,234,771 
4,325,282 
4,595,607 
5,318,801 


$6,794 
6,683 
8,002 
9,581 
9,782 
10,393 
12,028 


1900-1 


1901-2 


1902-3 


1903-4 


1904-5 


1905-6 



Maintenance. 

Within this same period the traffic density has more than 
doubled and the same is true of maintenance, the items comparing 
as follows: 



Year 


Traffic Density 


Mainte 


nance per Mile 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


963,094 
1,317,327 
1,510,534 
1,456,603 
1,714,423 
2,191,627 


$758 
1,183 
1,809 
1,555 
1,656 
1,793 


$ 889 
1,207 
1,513 
1,623 
1,728 
1,972 


$1,647 
2,390 
3,332 
3,178 
3,384 
3,765 


Average 


1,525,601 


$ 1,459 


$ 1,488 


$ 2,947 


N. Y. C. & StL 
Tol. St. L. &W 
Panhandle. . . . 


2,599,902 
1,046,149 
2,193,454 


$2,156 

996 

2,567 


$2,059 

959 

3,680 


$4,215 
1,955 
6,247 



It will be seen that traffic density compared, its maintenance 
charges were on about the same level as those of the Clover Leaf 
and about the same as the Nickel Plate, but not much more than 
two-thirds of the Panhandle. 

Undoubtedly maintenance, especially for 1906, represented a 
considerable surcharge. 

Surplus Earnings. 

The nominal surplus shown after the charges indicated above 
have been as follows : 



WHEELING & LAKE ERIE 



751 



Year 



1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



Surplus 



Def. 



$146,950 

72,123 

12,680 

63,654 

193,360 

152,397 



Per cent. 

Earned 

on 1st Pref. 



3.5 
1.4 

.25 
1.2 

3.1 



Average 
Price 
1st Pref. 



52 
57 
51 
45 
42 
42 



The Balance Sheet. 

As of June 30th, 1906, the balance sheet showed : 

Current Assets $3,701,967 

Current Liabilities 3,589,630 

Leaving a working balance of $112,337 

The item of cash on hand was $2,544,364 and the balance to 
credit of profit and loss was $406,796. In addition to the above 
assets noted there were advances for sundry extensions of $1,- 
355,137. 

. i . i ■■ * 

Investment Value. 

As noted under the Wabash analysis, the Wabash Terminal 
contract with the Carnegie Steel Company did not become operative 
until the close of the fiscal year of 1906. Undoubtedly the operations 
of this contract and the further completion of the connecting link 
between the Wabash Terminal and the Western Maryland line will 
add very heavily to the traffic of the Wheeling & Lake Erie ; while 
the construction of the Oroville cut-off will reduce the maximum 
gradient of that part of the line from 53 feet to 21 feet, the maximum 
curvature from 9° to 3° and provide a line fitted for highly economi- 
cal transport of freight. The approximate cost of this cut-off is 
estimated at $1,000,000. 

It is evident that with rapidly increasing earnings the status of 
the Wheeling & Lake Erie securities might be very materially 
altered. It is evident that even in 1906 maintenance charges might 
have been sufficiently reduced to show a larger margin of safety 
for the interest payments; and the amount of the first preferred 
stock is small. 

Both first and second preferred stocks are entitled to non- 
cumulative dividends of 4% per annum and 4% on the first pre- 



752 WHEELING & LAKE ERIE 

ferred would require under $200,000; 4% on the second preferred 
would need $480,000 more. 

It is evident that the road is shut up to bonds or notes for 
further capital issues and, as noted, the interest bearing debt is 
heavy. As increased traffic will require large capital expenditures 
it is evident that the question of dividends on either of the preferred 
stocks is rather remote. 

The first preferred sold as high as $66 per share in 1902, de- 
clining to $40 per share in 1903 and to $22 per share in March of 
1907. 

The second preferred sold as high as $42 per share in 1902, 
declining to $20 in 1903 and to $14 in March of 1907. 

The utility of the $20,000,000 common stock is not obvious. 
Yet it actually sold for $20 per share in 1902 and $21 in 1906, 
declining to $9^ in March of 1907. 



WISCONSIN CENTRAL RAILWAY. 

The Wisconsin Central operates a line of road from Chicago to 
Ashland on Lake Superior, with a branch to St. Paul and Minne- 
apolis on the west, and to Manitowoc on Lake Michigan. It obtains 
entrance into Chicago over the tracks of the Illinois Central, and into 
Milwaukee over the Chicago, Milwaukee and St. Paul, and in St. 
Paul and Minneapolis over the Great Northern, these traffic arrange- 
ments, with the exception of the Milwaukee contract, being for 
ninety-nine years. 

The road struggled along for years under a series of receiver- 
ships and bad managements, but in 1899 it came into new hands who 
undertook the upbuilding of the road, and since that time its 
growth has been steady. It is at present engaged in building an 
important extension to Duluth and Superior, which will give it a 
short and very direct line from Chicago to Duluth, and is ex- 
pected very materially to enhance the fortunes of the road. 

" ~' " "TSBI 

History. 

The present company was chartered in 1897, and in 1899 
acquired the properties of the Wisconsin Central and its subsidiary 
companies. The old company was in the hands of receivers from 
1879 to 1887, when a new company was organized which lasted 
for six years, until 1893, when new receivers were appointed 
who carried on the road until it came into the hands of the present 
company in 1899. The road was utilized by the Northern Pacific 
as an outlet from St. Paul to Chicago in the old Villard days, and 
in 1890 a close traffic contract was altered to a ninety-nine year 
lease to the Northern Pacific. This lease was cancelled in the 
crash of 1893, and since that time the road has been operated as 
an independent line. 

It is rather curious to reflect that the old Wisconsin Central 
was one of the roads in which John D. Rockefeller was supposed to 
have a principal interest, the other being the Missouri, Kansas and 
Texas, and both until recent years as badly managed roads as were 
to be found in the country. 

48 (753) ~ . _ . 



754 WISCONSIN CENTRAL 

In 1906 the company operated 977 miles of track, which will 
be slightly added to by the extension from Owen to Duluth. About 
half of this extension has been completed, and it was expected that 
the extension would be in operation in 1907. The road penetrates 
the great forests of Northern Wisconsin and reaches also into the 
iron regions, and its traffic is mainly made up of low grade mine 
and forest products. 

In 1906 the syndicate headed by W. A. Bradford, president of 
the Chicago, Cincinnati and Louisville, and George M. Cumming, 
president of the United States Mortgage and Trust Company of 
New York, obtained control of the road, purchasing the stock of 
Maitland, Coppell and Company, Brown Brothers and Company, 
James C. Colgate and Company, and Edward Sweet and Company. 
This change brought about the retirement of president H. F. 
Whitcomb, William L. Bull, chairman of the board, James C. Col- 
gate, Gerald L. White and John Crosby Brown, who had hitherto 
been dominant in the affairs of the new company. The new 
directors included George M. Cumming, New York, chairman of 
the board; William A. Bradford, Jr., of Cincinnati, president; T. 
L. Chadbourne, chairman of the executive committee ; C. G. Rasmus, 
of the United States Mortgage and Trust Company ; F. E. Dewey, 
Harry C. Starr, John F. Hill, Mark T. Cox and George A. Fernald 
of Boston, representing the syndicate in control ; Fred T. Gates, 
representing Rockefeller interests and William F. Vilas, Madison, 
Wisconsin, formerly Secretary of the Interior. 

It was stated at the time of the change that the purchase was 
not in the interests of the Canadian Pacific or of any of the larger 
lines, as had been rumored, and that the property would continue 
to be operated as an independent line. Mr. Bradford also stated 
that the fact of his being also president of the Chicago, Cincinnati 
and Louisville, was of no significance. 



Capitalization. 

One of the great difficulties under which the Wisconsin Cen- 
tral has always suffered is that under the successive reorganizations, 
the capital account was never scaled down, and in spite of a con- 
siderable increase in earnings, it is still very much over-capitalized. 
Deducting the amounts of common and preferred held in the treas- 
ury, the capitalization on June 30th, 1906, stood as follows : 



WISCONSIN CENTRAL 755 

Common stock (net) $16,147,876 

Preferred stock (net) 11,267,104 

Total stock $27,414,980 

Funded debt 30,946,485 

Total capital $58,361,465 

Rentals capit. at 4% 9,222,237 

Approximate gross capitalization $67,583,705 

Approx. capital per mile $69,174 

Average miles operated 977 

Net earnings on net capitalization 3.8% 

Stock on net capitalization 40% 

Fixed charges on total net income 69% 

Factor of Safety 31% 

The amounts of securities owned were too small to require con- 
sideration in the above tabulation. 

It will be seen that the capitalization per mile for a road with 
gross earnings of only $7,285 per mile is very high. The estimated 
net capitalization of $69,174 per mile compares with $32,057 per 
mile for the Chicago and Northwestern and $33,900 per mile for 
the Chicago, Milwaukee and St. Paul, both with rather higher 
mileage earnings. 

When net earnings are compared with the estimated net capi- 
talization, the percentage shown amounts to only 3.8% as against 
10.5% for the Northwestern, and 9.7% for the St. Paul. 

The stock represents 40% of the estimated net capitalization, 
but the Fixed Charges consumed in 1906 nearly 70% of the total 
net income, leaving a Factor of Safety for the securities of only 
about 30%. These latter items further reflect the financial weak- 
ness of the road. A Factor of Safety of only 30% for the interest, 
rental and other charges on a small road in the midst of powerful 
competitors is insufficient, and it is this which has so weakened the 
credit of the road that it has been unable to secure new capital on 
favorable terms until very recently. 

The Wisconsin Central has practically no outside holdings, 
and has therefore no equities worth mentioning. 



756 



WISCONSIN CENTRAL 



Increase of Capitalization. 

Since the reorganization of the road the capitalization has in- 
creased very slightly, the rentals paid have changed very little, and 
from the first full year of the operations of the new company the 
changes in nominal capitalization and earnings have been as follows : 



Year 


Common 
Stock 


Preferred 
Stock 


Funded 
Debt 


Total 
Capital 


Gross 
Earnings 


1900 

1906 


$15,807,876 
16,147,876 


$11,151,605 
11,267,104 


$26,276,500 
30,946,485 


$54,143,981 
58,361,465 


$5,637,416 
7,118,576 



Increase of six years: Total capital, 7%; gross earnings, 31%. 

Increase of 6 years: Total capital, 7% ; gross earnings, 26%. 

It will be seen that with a very slight increase in the nominal 
capitalization, the gross earnings have increased more than 25%. 
This is a very favorable showing. 

Stability of Earnings. 

The reports of the road do not itemize its traffic but as already 
stated it consists principally in the carriage of ores and lumber, and 
the average rate per ton-mile, .66c, is low for a road of that section. 
In spite of this the earnings have increased steadily and with very 
little increase of mileage are about 50% higher than in 1896-7. The 
items through a series of years appear as follows: 



Year 


Miles Operated 


Gross Earnings 


Per Mile 


1896-7 


934 
934 
939 
945 
955 
977 
977 
977 
977 
977 


$4,179,971 
4,939,725 
5,118,019 
5,637,416 
5,324,274 
6,041,470 
6,651,862 
6,466,176 
6,650,883 
7,118,576 


$4,475 


1897-8 


5,287 


1898-9 


5,450 


1899-0 


5,963 


1900-1 


5,574 


1901-2 


6,178 


1902-3 


6,808 


1903-4. . . 


6,618 


1904-5 


6,807 


1905-6 


7,285 







It will be seen that the earnings per mile have risen from $4,475 
in 1897 to $7,285 in 1906. This is an excellent showing in the face 
of the heavy handicap under which the road has been operated and 
the low rate which it is able to obtain on its freight. 

Maintenance. 

Not a rich road and with a low average of earnings, the general 
standard of the Wisconsin Central both as to roadbed and equip- 



WISCONSIN CENTRAL 



757 



ment is low. It had in 1906 only 184 engines and 8,751 cars, of 
which only 52, for example, were first class passenger cars. The 
standard of equipment is low and naturally the property does not 
require any such sums for maintenance as, for example, the North- 
western or the St. Paul, with which it directly competes. The com- 
parisons of traffic density and maintenance for a series of years 
are as follows : 



Year 


Traffic Density 


Maintenan 


ce per Mile 


Total 


Way 


Equipment 


1900-1 

1901-2 

1902-3 

1903-4 

1904-5 

1905-6 


547,505 
650,708 
753,692 
758,746 
758,037 
822,935 


$659 
799 

780 
755 

886 
879 


$500 
623 
736 
725 
795 
824 


$1,159 
1,422 
1,516 
1,480 
1,681 
1,703 




715,270 


$793 


$700 


$1,493 


Northwestern.. 
St. Paul 


640,983 
601,003 


991 
929 


858 
632 


1,849 
1,561 



The average of maintenance is not very heavy. It will be seen 
that its traffic density is slightly higher than the average of either 
the North Western or the St. Paul, but it has nothing like the pas- 
senger earnings of these two roads, and the fact that its total for 
maintenance per mile is nearly up to that of the St. Paul indicates 
that maintenance has been perhaps adequate, though the standard 
of neither the St. Paul nor the North Western is high. It is prob- 
able that the road has spent all that it was able to spend, and in 
addition to this it has systematically turned back practically all of 
its surplus into improvements. The appropriations since the road 
came under its present management have been as follows : 



1899-00 $450,747 

1900-1 11,350 

1901-2 124,990 

1902-3 563,098 

1903-4 643,574 

1904-5 423,997 

1905-6 373,420 

Total $2,591,176 



758 



WISCONSIN CENTRAL 



Surplus Earnings. 

The amount of surplus for six years, before the improvement 
charges noted above, and small sinking fund charges amounting to 
about $65,000 a year, have been as follows : 



Year 



1900-1 
1901-2 
1902-3 
1903-4 
1904-5 
1905-6 



Surplus 



$246,117 
480,104 
724,072 
424,247 
555,844 
802,188 



Per cent. 
Earned on 
Preferred 



2.2 

4.3 

6.5 

3.8 

5. 

7.2 



Average 

Price 
Preferred 



44 
48 
44 
43 
54 
54 



It will be seen from this that the road has been able to earn a 
small percentage on its preferred stock, though no dividends have 
ever been paid. 

The Balance Sheet. 

At the close of the fiscal year of 1906 the balance sheet, ex- 
cluding materials on hand showed : 

Current assets. $1,346,224 

Current liabilities 1,493,576 

Leaving a nominal debit balance of $147,352 

In addition there were assets in the land department of $594,- 
350, and cash for reserve funds and appropriations, $392,796. 

The balance sheet shows also construction loans to the amount 
of $1,199,000 against which there was cash in hand and securities 
deposited to the same amount. The assets also show construction 
funds on deposit of $1,244,621, so that adding these items together 
it appears that the company was fairly well off for working capital 
and provided with cash on its extension to Duluth. 

Investment Value. 

The preferred stock is entitled to non-cumulative dividends of 
4% per annum and after 4% dividends have been paid on the com- 
mon, in any year, both classes participate in any further dividend. 
As noted above no dividends have been paid. 

The holders of the preferred stock have the right to elect a 
majority of the board of directors, whenever for two successive 
years the full 4% has not been earned and paid in cash. Although 



WISCONSIN CENTRAL 759 

the surplus shown through the six years has averaged 4.8% on 
the preferred, or sufficient to pay the full dividend, the shareholders 
have permitted these excess earnings to be turned back into the 
road for improvements, and the right of election of a majority of 
the board has not been exercised. 

Wisconsin Central preferred sold as high as $57 per share in 
1902, declining to $33 in 1903, and rising to $64 in 1906. It is to 
be supposed that the syndicate now dominating in the road has a 
working control, so that the value of the balance of the preferred 
held outside is very largely dependent upon the disposition of the 
controlling interests. The Great Northern and the Northern Pa- 
cific now have an outlet to Chicago through their ownership of the 
Burlington and the competition of the Central with the North- 
western or the St. Paul is not of such a character as to make it any 
great interest to these roads to control the property. The line to 
which the acquisition of the Wisconsin Central would probably be 
most useful is the Canadian Pacific or rather its subsidiary Minn., 
St. Paul & Sault Ste. Marie ; but it is not very clear that an 
outlet for these lines to Chicago would be any decisive strategic ad- 
vntage and it is not likely that control of the road could now be 
obtained at a price that would make it a very attractive purchase. 

A six per cent, capitalization of its net earnings in 1906 would 
give the road a valuation of about $43,000,000, and deducting from 
this the funded debt of about $31,000,000 would leave $80 per share 
for the 4% preferred and about $20 per share for the common 
stock outstanding. Were 4% dividends paid on the preferred as 
they could have been paid in 1905 and 1906, as well as on the earn- 
ings of 1903, the preferred might sell at around the figure noted 
above, and should the road show under the new management the 
same steady progress it has shown in the six previous years, the 
preferred shareholders might reasonably expect a dividend. The 
average price of the preferred in 1906 was a little over $50 per 
share, and in March of 1907 it sold at $36. Purchased at any such 
considerable recession in prices the stock, if put away and held 
ought to show a steady enhancement in value and eventually a satis- 
factory yield in dividends. 

The common stock is one of a numerous class of "low-priced" 
shares w r hich are bandied about in the stock market and having no 
particular value other than prospects, rise and fall with the general 
rise and fall of prices. It sold as high as $33 per share in 1906, as 
low as $14 per share in 1903, and $16 in March, 1907. Purchased 



760 WISCONSIN CENTRAL 

at something like these figures, as a pure speculation, and held, it 
is apt to show a fair return to the purchaser who buys it simply for 
the purpose of selling it again when the general market rises. As 
an investment there is nothing in the progress of the road to indi- 
cate that it has any large prospects or any solid value. 



YAZOO AND MISSISSIPPI VALLEY RAILROAD. 

The Yazoo and Mississippi Valley is a subsidiary line of the 
Illinois Central, operating a network of railroads through the low 
lands of the Mississippi Valley, from Memphis to New Orleans, 
paralleling the main line of the Central. In 1906 it operated an aver- 
age of 1,211 miles with gross earnings of $8,171,250. 

Operating expenses, including taxes, were very heavy, 
amounting to 84% of the gross income, and leaving a very slight 
sum — $29,617 — for surplus over Fixed Charges. This surplus 
was before any payment on the second mortgage on which no 
payment was made in either 1905 or 1906. The same is true of 
the $10,000,000 of land grant income bonds on which no interest 
has ever been paid. 

Practically all of the stock and bonds of the road are owned 
by the Illinois Central. 

It is evident that the operating charges were adjusted to 
absorb practically the entire available surplus over Fixed 
Charges. The maintenance charges were especially heavy in 
1906, the appropriations for way amounting to $1,810 per mile, as 
against $1,553 for the year preceding. 

The appropriations for maintenance of equipment amounted 
to $856 per mile in 1906, as against $781 in 1905. These charges 
on a road with gross earnings of $7,159 per mile and a traffic 
density of 640,167 ton-miles per mile of road were assuredly high. 

The total of $2,664 per mile compares with $3,289 for the 
parent road, with nearly double the traffic density. It is not 
improbable that the road could be very amply maintained even 
on the Illinois Central standard at somewhere around $2,000 per 
mile. Probably operating expenses in 1900 concealed upwards 
of $700 per mile of legitimate earnings. This on the 1,211 miles 
of operated road would have shown a surplus of over $850,000 
for the year above Fixed Charges, and this would have been 
sufficient to pay the regular 5% due on the second mortgage 
bonds and the sum of $350,000 additional on the interest in ar- 

(761) 



762 YAZOO & MISSISSIPPI VALLEY 

rears. This would have meant a matter of $850,000 added to the 
Other Income of the parent road. 

The average rate per ton per mile received by the road is 
high, amounting to .82c in 1906, and .89c in 1905. 

The Funded Debt on which charges are fixed amounts to 
only about $27,000 per mile, which on a road with average earn- 
ings of $7,000 per mile is not unduly excessive. The year of 1906 
was not an exceptional year, the average earnings per mile show- 
ing a slight decrease from 1905. There is no apparent reason 
why operating charges should be 15% above the general average 
of 68% to 70% for American roads, save in the determination 
of the management to put earnings into improvements. 

The road may therefore be regarded as an equity of steadily 
increasing value in the assets of the parent company. 



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MOODY'S MANUAL 

OF 

Railroads and Corporation Securities for 1907. 

EIGHTH ANNUAL EDITION 



Steam Railroad Division. In this division, to which nearly 900 
pages are given, a statement is published of every steam railroad company in 
the United States, and nearly every company in Canada, Mexico and Cuba. 
In all, 256,301 miles of main track is represented, covering no less than 1,512 
actual operating corporations. The par value capitalization represented in 
this division is $15,436,297,000, of which $5,978,412,000 is in stocks and $9,458,- 
885,000 in bonds. In each case a full description of the property is given, in- 
cluding location, mileage, etc.; capitalization figures are furnished with com- 
plete dividend record, transfer agents, etc.; bonded debt is especially com- 
plete, detailed descriptions being given of all bond issues. Over 2,250 issues 
are completely described. Financial statements are given in practically every 
case, showing earnings, balance sheets, surplus, and all other essential facts. 
Lastly, complete lists of both officers and directors, with addressses, are appended to 
each statement. In short, the steam railroad division of the book furnishes a com- 
plete statistical and investment record of the entire steam railroad industry of 
America months in advance of the publication of the Interstate Commerce 
Commission's report or any other reference manual. Practically all of the 
important systems are supplemented in their statements by up-to-date colored 
maps, this being an especially strong feature of the 1907 edition. Other fea- 
tures of value in this section, include lists of new lines under construction or 
projected, lists of absorbed roads, and also special descriptions of all the guar- 
anteed stocks. 

Public Utilities Division. This division is sub-divided into four 
sections under the following special heads: Electric Tractions, Gas, Electric 
Light and Power Companies; Water Supply Companies, Telephone, Telegraph 
and Cable Companies. Over 800 pages are given to the statements of cor- 
porations of this nature, and more than 2,800 of such corporations are 
described. These include over 1,100 electric traction companies operating 
more than 31,000 miles of track; 1,130 gas, electric light and power companies; 
267 water supply companies and 259 telephone, telegraph and cable com- 
panies. The total capitalization represented in this division is $8,129,534,000, 
of which $4,455,454,000 is represented by stocks and $3,675,010,000 by bonds. 
As in the steam railroad division the descriptions in each case cover a state- 
ment showing location and character of the property, capital stock with divi- 
dends paid, transfer offices, etc.; bonded debt with full descriptions; financial 



statements, showing comparative balance sheets and income accounts where- 
ever obtainable; complete lists of officers and directors with addresses, etc. 

In every department of the Public Utilities division, the Manual furnishes 
far more information than any other publication of its kind in the world. 
There are several other publications furnishing investment information on 
electric traction companies, but none are so complete or up-to-date as Moody's 
Manual. Many of the larger statements are supplemented with handsome 
colored maps as in the case of the steam railroad systems. In the gas, electric 
light, water and telephone sections, the field is occupied almost exclusively by 
Moody's Manual. No other publications make a pretense of furnishing investment 
information over this wide area. Bankers and investors in both this country 
and Europe regard Moody's Manual as the only authoritative source from 
which to secure information on gas, electric light and telephone investments. 
Additional features of value in the division include lists of new traction lines 
projected or under construction and a complete alphabetical list of absorbed 
or consolidated corporations. 

Industrial Division. The information supplied in this division em- 
braces 1,510 corporations, of which 1,456 are in the United States, the balance 
being in Canada, Mexico and Cuba. The corporations are all of a manufactur- 
ing or commercial nature, and include also coal mining and iron mining 
properties, as well as steamship lines and other transportation organizations 
outside of steam railroads and tractions. The total capitalization represented 
in this division amounts to $10,156,332,000 of which $9,849,833,000 is located in 
the United States. Moody's Manual has always been known as the only com- 
plete and thoroughly reliable publication on the subject of industrial corpor- 
ations, but in the 1907 edition, especial effort has been made to cover these cor- 
porations in an even more comprehensive and useful way and the statements 
embrace, not only the usual descriptions of the properties with capitalizations, 
earnings, etc., but in every case possible uniform balance sheets with compar- 
ative income accounts are given. In addition, there is appended to each state- 
ment a list of the officers and directors of the company with addresses, etc. 
A complete list of absorbed or consolidated corporations is printed at the 
end of the division. About 500 pages are devoted to this division. 

Mining Division. In the division on mines 880 active mining cor- 
porations are reported and full statements given. These active corporations 
represent a capitalization in stocks and bonds of $2,525,113,000, and include 
379 gold mines, 308 copper mines, as well as a large number of mines produc- 
ing silver, lead, cobalt, zinc, etc. There is one sapphire mine reported, one 
ruby mine and one meerschaum mine. 

No satisfactory directory or manual of mining companies has heretofore 
been published in this country, and this year Moody's Manual has made a 
special effort to cover this field, confining its descriptions, of course, to genuine 
active companies, which are producers or are under legitimate development. 

Bank and Trust Company Division. This division is practi- 
cally an American Banking directory arranged alphabetically by states, with the 
added feature of useful investment information. In all cases where possible 
the par value of bank stocks is given with the amounts and dates of dividends 
paid. In addition, the capital stock, surplus and resources of the banks are 



shown and the names of president and cashier are reported. As a large and 
steadily increasing proportion of the funds of American investors is going 
into bank and trust company's stocks it is becoming increasingly necessary 
that the essential facts regarding the prices and values of these stocks be 
given uniform publicity in some authoritative way. This the 1907 Manual 
does in a more complete sense than any other publication. 

Alphabetical Index. The Alphabetical Index of the volume is 
placed in the front of the book, in order to be found with little effort. It is the 
key to the entire volume and embraces the title of every corporation described in 
the book, as well as every sub or controlled corporation having a separate ex- 
istence; every bond or stock of different title than the controlling corporation 
and every other separate subject or title of any nature in the volume. The en- 
tire index is so clearly and simply arranged that it is practically impossible not 
to find the fact's for which the user may be searching. It is the acme of complete 
indexing. 

To supplement the alphabetical index a special index arranged alphabeti- 
cally by cities is also furnished. This is of great value to any one who, in 
searching for a statement, may be familiar with the location of a corporation, 
but not the name. 

Supplementary Information. Although Moody's Manual is issued 
but once a year, the user is enabled to keep up to date on all important in- 
formation through the investment news department of Moody's Magazine, 
which is published monthly, supplementing the Manual in every important 
respect. Every event of importance in the corporate or investment line is 
given as it occurs in the pages of the Magazine, and proper indexing is pro- 
vided in the Magazine news reports to indicate the connection with the 
original statements in the foregoing edition of the Manual. 

The Combination Price. The price of the 1907 edition of Moody's 
Manual, delivered to any part of the United States, Canada or Mexico, and 
including Moody's Magazine as a supplement for the entire year, is $12 for 
the cloth edition and $14 for the leather edition. The Manual is now ready and 
embraces about 3,000 pages; the Magazine appears on the first of every month, 
each issue embracing 150 pages, making a total for the year of about 1800 pages. 
In all, therefore, the purchaser will receive in the course of a year nearly 5,000 
pages of investment news and information of the most up-to-date, exhaustive 
and authoritative character at the cost of only $12 per annum. Price of Manual 
without Magazine, $10 in cloth and $12 in leather. 



The Moody Corporation 

Publishers - Importers - Booksellers 

35 Nassau Street, - New York City 

London : Fredc. C. Mathieson CBi Sons, 16 Copthall Ave., E. C. 



JUL 10 1907 



